关键词：Securities

11 INVESTMENT ADVISERS ACT OF 1940 Sec. 203
with any such activity, or in connection with the purchase or
sale of any security.
(5) has willfully violated any provision of the Securities Act
of 1933, the Securities Exchange Act of 1934, the Investment
Company Act of 1940, this title, the Commodity Exchange Act,
or the rules or regulations under any such statutes or any rule
of the Municipal Securities Rulemaking Board, or is unable to
comply with any such provision.
(6) has willfully aided, abetted, counseled, commanded, induced,
or procured the violation by any other person of any
provision of the Securities Act of 1933, the Securities Exchange
Act of 1934, the Investment Company Act of 1940, this title,
the Commodity Exchange Act, the rules or regulations under
any of such statutes, or the rules of the Municipal Securities
Rulemaking Board, or has failed reasonably to supervise, with
a view to preventing violations of the provisions of such statutes,
rules, and regulations, another person who commits such
a violation, if such other person is subject to his supervision.
For the purposes of this paragraph no person shall be deemed
to have failed reasonably to supervise any person, if—
(A) there have been established procedures, and a system
for applying such procedures, which would reasonably
be expected to prevent and detect, insofar as practicable,
any such violation by such other person, and
(B) such person has reasonably discharged the duties
and obligations incumbent upon him by reason of such procedures
and system without reasonable cause to believe
that such procedures and system were not being complied
with.
(7) is subject to any order of the Commission barring or
suspending the right of the person to be associated with an
investment adviser;
(8) has been found by a foreign financial regulatory authority
to have—
(A) made or caused to be made in any application for
registration or report required to be filed with a foreign
securities authority, or in any proceeding before a foreign
securities authority with respect to registration, any statement
that was at the time and in light of the circumstances
under which it was made false or misleading
with respect to any material fact, or has omitted to state
in any application or report to a foreign securities authority
any material fact that is required to be stated therein;
(B) violated any foreign statute or regulation regarding
transactions in securities or contracts of sale of a commodity
for future delivery traded on or subject to the rules
of a contract market or any board of trade; or
(C) aided, abetted, counseled, commanded, induced, or
procured the violation by any other person of any foreign
statute or regulation regarding transactions in securities
or contracts of sale of a commodity for future delivery
traded on or subject to the rules of a contract market or
any board of trade, or has been found, by the foreign
finanical regulatory authority, to have failed reasonably to
Sec. 203 INVESTMENT ADVISERS ACT OF 1940 12
supervise, with a view to preventing violations of statutory
provisions, and rules and regulations promulgated thereunder,
another person who commits such a violation, if
such other person is subject to his supervision; or
(9) is subject to any final order of a State securities commission
(or any agency or officer performing like functions),
State authority that supervises or examines banks, savings
associations, or credit unions, State insurance commission (or
any agency or office performing like functions), an appropriate
Federal banking agency (as defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813(q))), or the National
Credit Union Administration, that—
(A) bars such person from association with an entity
regulated by such commission, authority, agency, or officer,
or from engaging in the business of securities, insurance,
banking, savings association activities, or credit
union activities; or
(B) constitutes a final order based on violations of any
laws or regulations that prohibit fraudulent, manipulative,
or deceptive conduct.
(f) The Commission, by order, shall censure or place limitations
on the activities of any person associated, seeking to become associated,
or, at the time of the alleged misconduct, associated or seeking
to become associated with an investment adviser, or suspend
for a period not exceeding twelve months or bar any such person
from being associated with an investment adviser, if the Commission
finds, on the record after notice and opportunity for hearing,
that such censure, placing of limitations, suspension, or bar is in
the public interest and that such person has committed or omitted
any act or omission enumerated in paragraph (1), (5), (6), (8), or
(9) of subsection (e) or has been convicted of any offense specified
in paragraph (2) or (3) of subsection (e) within ten years of the
commencement of the proceedings under this subsection, or is enjoined
from any action, conduct, or practice specified in paragraph
(4) of subsection (e). It shall be unlawful for any person as to whom
such an order suspending or barring him from being associated
with an investment adviser is in effect willfully to become, or to be,
associated with an investment adviser without the consent of the
Commission, and it shall be unlawful for any investment adviser
to permit such a person to become, or remain, a person associated
with him without the consent of the Commission, if such investment
adviser knew, or in the exercise of reasonable care, should
have known, of such order.
(g) Any successor to the business of an investment adviser registered
under this section shall be deemed likewise registered hereunder,
if within thirty days from its succession to such business it
shall file an application for registration under this section, unless
and until the Commission, pursuant to subsection (c) or subsection
(e) of this section, shall deny registration to or revoke or suspend
the registration of such successor.
(h) Any person registered under this section may, upon such
terms and conditions as the Commission finds necessary in the
public interest or for the protection of investors, withdraw from
registration by filing a written notice of withdrawal with the Com13
INVESTMENT ADVISERS ACT OF 1940 Sec. 203
mission. If the Commission finds that any person registered under
this section, or who has pending an application for registration
filed under this section, is no longer in existence, is not engaged
in business as an investment adviser, or is prohibited from registering
as an investment adviser under section 203A, the Commission
shall by order cancel the registration of such person.
(i) MONEY PENALTIES IN ADMINISTRATIVE PROCEEDINGS.—
(1) AUTHORITY OF COMMISSION.—In any proceeding instituted
pursuant to subsection (e) or (f) against any person, the
Commission may impose a civil penalty if it finds, on the
record after notice and opportunity for hearing, that such
person—
(A) has willfully violated any provision of the Securities
Act of 1933, the Securities Exchange Act of 1934, the
Investment Company Act of 1940, or this title, or the rules
or regulations thereunder;
(B) has willfully aided, abetted, counseled, commanded,
induced, or procured such a violation by any
other person;
(C) has willfully made or caused to be made in any application
for registration or report required to be filed with
the Commission under this title, or in any proceeding before
the Commission with respect to registration, any
statement which was, at the time and in the light of the
circumstances under which it was made, false or misleading
with respect to any material fact, or has omitted
to state in any such application or report any material fact
which was required to be stated therein; or
(D) has failed reasonably to supervise, within the
meaning of subsection (e)(6), with a view to preventing violations
of the provisions of this title and the rules and regulations
thereunder, another person who commits such a
violation, if such other person is subject to his supervision;
and that such penalty is in the public interest.
(2) MAXIMUM AMOUNT OF PENALTY.—
(A) FIRST TIER.—The maximum amount of penalty for
each act or omission described in paragraph (1) shall be
$5,000 for a natural person or $50,000 for any other person.
(B) SECOND TIER.—Notwithstanding subparagraph (A),
the maximum amount of penalty for each such act or omission
shall be $50,000 for a natural person or $250,000 for
any other person if the act or omission described in paragraph
(1) involved fraud, deceit, manipulation, or deliberate
or reckless disregard of a regulatory requirement.
(C) THIRD TIER.—Notwithstanding subparagraphs (A)
and (B), the maximum amount of penalty for each such act
or omission shall be $100,000 for a natural person or
$500,000 for any other person if—
(i) the act or omission described in paragraph (1)
involved fraud, deceit, manipulation, or deliberate or
reckless disregard of a regulatory requirement; and
(ii) such act or omission directly or indirectly resulted
in substantial losses or created a significant
Sec. 203 INVESTMENT ADVISERS ACT OF 1940 14
risk of substantial losses to other persons or resulted
in substantial pecuniary gain to the person who committed
the act or omission.
(3) DETERMINATION OF PUBLIC INTEREST.—In considering
under this section whether a penalty is in the public interest,
the Commission may consider—
(A) whether the act or omission for which such penalty
is assessed involved fraud, deceit, manipulation, or deliberate
or reckless disregard of a regulatory requirement;
(B) the harm to other persons resulting either directly
or indirectly from such act or omission;
(C) the extent to which any person was unjustly enriched,
taking into account any restitution made to persons
injured by such behavior;
(D) whether such person previously has been found by
the Commission, another appropriate regulatory agency, or
a self-regulatory organization to have violated the Federal
securities laws, State securities laws, or the rules of a selfregulatory
organization, has been enjoined by a court of
competent jurisdiction from violations of such laws or
rules, or has been convicted by a court of competent jurisdiction
of violations of such laws or of any felony or misdemeanor
described in section 203(e)(2) of this title;
(E) the need to deter such person and other persons
from committing such acts or omissions; and
(F) such other matters as justice may require.
(4) EVIDENCE CONCERNING ABILITY TO PAY.—In any proceeding
in which the Commission may impose a penalty under
this section, a respondent may present evidence of the respondent’s
ability to pay such penalty. The Commission may, in its
discretion, consider such evidence in determining whether such
penalty is in the public interest. Such evidence may relate to
the extent of such person’s ability to continue in business and
the collectability of a penalty, taking into account any other
claims of the United States or third parties upon such person’s
assets and the amount of such person’s assets.
(j) AUTHORITY TO ENTER AN ORDER REQUIRING AN ACCOUNTING
AND DISGORGEMENT.—In any proceeding in which the Commission
may impose a penalty under this section, the Commission may
enter an order requiring accounting and disgorgement, including
reasonable interest. The Commission is authorized to adopt rules,
regulations, and orders concerning payments to investors, rates of
interest, periods of accrual, and such other matters as it deems
appropriate to implement this subsection.
(k) CEASE-AND-DESIST PROCEEDINGS.—
(1) AUTHORITY OF THE COMMISSION.—If the Commission
finds, after notice and opportunity for hearing, that any person
is violating, has violated, or is about to violate any provision
of this title, or any rule or regulation thereunder, the Commission
may publish its findings and enter an order requiring
such person, and any other person that is, was, or would be a
cause of the violation, due to an act or omission the person
knew or should have known would contribute to such violation,
to cease and desist from committing or causing such violation
15 INVESTMENT ADVISERS ACT OF 1940 Sec. 203
and any future violation of the same provision, rule, or regulation.
Such order may, in addition to requiring a person to cease
and desist from committing or causing a violation, require such
person to comply, or to take steps to effect compliance, with
such provision, rule, or regulation, upon such terms and conditions
and within such time as the Commission may specify in
such order. Any such order may, as the Commission deems
appropriate, require future compliance or steps to effect future
compliance, either permanently or for such period of time as
the Commission may specify, with such provision, rule, or regulation
with respect to any security, any issuer, or any other
person.
(2) HEARING.—The notice instituting proceedings pursuant
to paragraph (1) shall fix a hearing date not earlier than 30
days nor later than 60 days after service of the notice unless
an earlier or a later date is set by the Commission with the
consent of any respondent so served.
(3) TEMPORARY ORDER.—
(A) IN GENERAL.—Whenever the Commission determines
that the alleged violation or threatened violation
specified in the notice instituting proceedings pursuant to
paragraph (1), or the continuation thereof, is likely to result
in significant dissipation or conversion of assets, significant
harm to investors, or substantial harm to the public
interest, including, but not limited to, losses to the
Securities Investor Protection Corporation, prior to the
completion of the proceedings, the Commission may enter
a temporary order requiring the respondent to cease and
desist from the violation or threatened violation and to
take such action to prevent the violation or threatened violation
and to prevent dissipation or conversion of assets,
significant harm to investors, or substantial harm to the
public interest as the Commission deems appropriate
pending completion of such proceedings. Such an order
shall be entered only after notice and opportunity for a
hearing, unless the Commission, notwithstanding section
211(c) of this title, determines that notice and hearing
prior to entry would be impracticable or contrary to the
public interest. A temporary order shall become effective
upon service upon the respondent and, unless set aside,
limited, or suspended by the Commission or a court of
competent jurisdiction, shall remain effective and enforceable
pending the completion of the proceedings.
(B) APPLICABILITY.—This paragraph shall apply only
to a respondent that acts, or, at the time of the alleged
misconduct acted, as a broker, dealer, investment adviser,
investment company, municipal securities dealer, government
securities broker, government securities dealer, or
transfer agent, or is, or was at the time of the alleged misconduct,
an associated person of, or a person seeking to become
associated with, any of the foregoing.
(4) REVIEW OF TEMPORARY ORDERS.—
(A) COMMISSION REVIEW.—At any time after the respondent
has been served with a temporary cease-and-deSec.
203A INVESTMENT ADVISERS ACT OF 1940 16
sist order pursuant to paragraph (3), the respondent may
apply to the Commission to have the order set aside, limited,
or suspended. If the respondent has been served with
a temporary cease-and-desist order entered without a prior
Commission hearing, the respondent may, within 10 days
after the date on which the order was served, request a
hearing on such application and the Commission shall hold
a hearing and render a decision on such application at the
earliest possible time.
(B) JUDICIAL REVIEW.—Within—
(i) 10 days after the date the respondent was
served with a temporary cease-and-desist order entered
with a prior Commission hearing, or
(ii) 10 days after the Commission renders a decision
on an application and hearing under subparagraph
(A), with respect to any temporary cease-anddesist
order entered without a prior Commission hearing,
the respondent may apply to the United States district
court for the district in which the respondent resides or
has its principal place of business, or for the District of Columbia,
for an order setting aside, limiting, or suspending
the effectiveness or enforcement of the order, and the court
shall have jurisdiction to enter such an order. A respondent
served with a temporary cease-and-desist order entered
without a prior Commission hearing may not apply
to the court except after hearing and decision by the Commission
on the respondent’s application under subparagraph
(A) of this paragraph.
(C) NO AUTOMATIC STAY OF TEMPORARY ORDER.—The
commencement of proceedings under subparagraph (B) of
this paragraph shall not, unless specifically ordered by the
court, operate as a stay of the Commission’s order.
(D) EXCLUSIVE REVIEW.—Section 213 of this title shall
not apply to a temporary order entered pursuant to this
section.
(5) AUTHORITY TO ENTER AN ORDER REQUIRING AN ACCOUNTING
AND DISGORGEMENT.—In any cease-and-desist proceeding
under paragraph (1), the Commission may enter an
order requiring accounting and disgorgement, including reasonable
interest. The Commission is authorized to adopt rules,
regulations, and orders concerning payments to investors, rates
of interest, periods of accrual, and such other matters as it
deems appropriate to implement this subsection.
SEC. 203A. ø80b–3a¿ STATE AND FEDERAL RESPONSIBILITIES.
(a) ADVISERS SUBJECT TO STATE AUTHORITIES.—
(1) IN GENERAL.—No investment adviser that is regulated
or required to be regulated as an investment adviser in the
State in which it maintains its principal office and place of
business shall register under section 203, unless the investment
adviser—
(A) has assets under management of not less than
$25,000,000, or such higher amount as the Commission
17 INVESTMENT ADVISERS ACT OF 1940 Sec. 203A
1 The National Securities Markets Improvement Act of 1996 (P.L. 104–290; 110 Stat. 3438)
included section 306 and 307 which provide as follows:
SEC. 306. ø15 U.S.C. 80b–10 note¿ INVESTOR ACCESS TO INFORMATION.
The Commission shall—
(1) provide for the establishment and maintenance of a readily accessible telephonic or
other electronic process to receive inquiries regarding disciplinary actions and proceedings
involving investment advisers and persons associated with investment advisers; and
(2) provide for prompt response to any inquiry described in paragraph (1).
SEC. 307. ø15 U.S.C. 80b–3a note¿ CONTINUED STATE AUTHORITY.
(a) PRESERVATION OF FILING REQUIREMENTS.—Nothing in this title or any amendment made
by this title prohibits the securities commission (or any agency or office performing like functions)
of any State from requiring the filing of any documents filed with the Commission pursuant
to the securities laws solely for notice purposes, together with a consent to service of process
and any required fee.
Continued
may, by rule, deem appropriate in accordance with the
purposes of this title; or
(B) is an adviser to an investment company registered
under title I of this Act.
(2) DEFINITION.—For purposes of this subsection, the term
‘‘assets under management’’ means the securities portfolios
with respect to which an investment adviser provides continuous
and regular supervisory or management services.
(b) ADVISERS SUBJECT TO COMMISSION AUTHORITY.—
(1) IN GENERAL.—No law of any State or political subdivision
thereof requiring the registration, licensing, or
qualification as an investment adviser or supervised person of
an investment adviser shall apply to any person—
(A) that is registered under section 203 as an investment
adviser, or that is a supervised person of such person,
except that a State may license, register, or otherwise
qualify any investment adviser representative who has a
place of business located within that State; or
(B) that is not registered under section 203 because
that person is excepted from the definition of an investment
adviser under section 202(a)(11).
(2) LIMITATION.—Nothing in this subsection shall prohibit
the securities commission (or any agency or office performing
like functions) of any State from investigating and bringing
enforcement actions with respect to fraud or deceit against an
investment adviser or person associated with an investment
adviser.
(c) EXEMPTIONS.—Notwithstanding subsection (a), the Commission,
by rule or regulation upon its own motion, or by order upon
application, may permit the registration with the Commission of
any person or class of persons to which the application of subsection
(a) would be unfair, a burden on interstate commerce, or
otherwise inconsistent with the purposes of this section.
(d) FILING DEPOSITORIES.—The Commission may, by rule, require
an investment adviser—
(1) to file with the Commission any fee, application, report,
or notice required by this title or by the rules issued under this
title through any entity designated by the Commission for that
purpose; and
(2) to pay the reasonable costs associated with such filing. 1
Sec. 204 INVESTMENT ADVISERS ACT OF 1940 18
(b) PRESERVATION OF FEES.—Until otherwise provided by law, rule, regulation, or order, or
other administrative action of any State, or any political subdivision thereof, adopted after the
date of enactment of this Act, filing, registration, or licensing fees shall, notwithstanding the
amendments made by this title, continue to be paid in amounts determined pursuant to the law,
rule, regulation, or order, or other administrative action as in effect on the day before such date
of enactment.
(c) AVAILABILITY OF PREEMPTION CONTINGENT ON PAYMENT OF FEES.—
(1) IN GENERAL.—During the period beginning on the date of enactment of this Act and
ending 3 years after that date of enactment, the securities commission (or any agency or
office performing like functions) of any State may require registration of any investment adviser
that fails or refuses to pay the fees required by subsection (b) in or to such State, notwithstanding
the limitations on the laws, rules, regulations, or orders, or other administrative
actions of any State, or any political subdivision thereof, contained in subsection (a),
if the laws of such State require registration of investment advisers.
(2) DELAYS.—For purposes of this subsection, delays in payment of fees or underpayments
of fees that are promptly remedied in accordance with the applicable laws, rules, regulations,
or orders, or other administrative actions of the relevant State shall not constitute
a failure or refusal to pay fees.
(e) STATE ASSISTANCE.—Upon request of the securities commissioner
(or any agency or officer performing like functions) of any
State, the Commission may provide such training, technical
assistance, or other reasonable assistance in connection with the
regulation of investment advisers by the State.
ANNUAL AND OTHER REPORTS
SEC. 204. ø80b–4¿ Every investment adviser who makes use of
the mails or of any means or instrumentality of interstate commerce
in connection with his or its business as an investment adviser
(other than one specifically exempted from registration pursuant
to section 203(b) of this title), shall make and keep for prescribed
periods such records (as defined in section 3(a)(37) of the
Securities Exchange Act of 1934), furnish such copies thereof, and
make and disseminate such reports as the Commission, by rule,
may prescribe as necessary or appropriate in the public interest or
for the protection of investors. All records (as so defined) of such
investment advisers are subject at any time, or from time to time,
to such reasonable periodic, special, or other examinations by representatives
of the Commission as the Commission deems necessary
or appropriate in the public interest or for the protection of
investors.
PREVENTION OF MISUSE OF NONPUBLIC INFORMATION
SEC. 204A. ø80b–4a¿ Every investment adviser subject to section
204 of this title shall establish, maintain, and enforce written
policies and procedures reasonably designed, taking into consideration
the nature of such investment adviser’s business, to prevent
the misuse in violation of this Act or the Securities Exchange Act
of 1934, or the rules or regulations thereunder, of material, nonpublic
information by such investment adviser or any person associated
with such investment adviser. The Commission, as it deems
necessary or appropriate in the public interest or for the protection
of investors, shall adopt rules or regulations to require specific policies
or procedures reasonably designed to prevent misuse in violation
of this Act or the Securities Exchange Act of 1934 (or the rules
or regulations thereunder) of material, nonpublic information.
19 INVESTMENT ADVISERS ACT OF 1940 Sec. 205
INVESTMENT ADVISORY CONTRACTS
SEC. 205. ø80b–5¿ (a) No investment adviser, unless exempt
from registration pursuant to section 203(b), shall make use of the
mails or any means or instrumentality of interstate commerce, directly
or indirectly, to enter into, extend, or renew any investment
advisory contract, or in any way to perform any investment advisory
contract entered into, extended, or renewed on or after the
effective date of this title, if such contract—
(1) provides for compensation to the investment adviser on
the basis of a share of capital gains upon or capital appreciation
of the funds or any portion of the funds of the client;
(2) fails to provide, in substance, that no assignment of
such contract shall be made by the investment adviser without
the consent of the other party by the contract; or
(3) fails to provide, in substance, that the investment adviser,
if a partnership, will notify the other party to the contract
of any change in the membership of such partnership
within a reasonable time after such change.
(b) Paragraph (1) of subsection (a) shall not—
(1) be construed to prohibit an investment advisory contract
which provides for compensation based upon the total
value of a fund averaged over a definite period, or as of definite
dates, or taken as of a definite date;
(2) apply to an investment advisory contract with—
(A) an investment company registered under title I of
this Act, or
(B) any other person (except a trust, governmental
plan, collective trust fund, or separate account referred to
in section 3(c)(11) of title I of this Act), provided that the
contract relates to the investment of assets in excess of $1
million,
if the contract provides for compensation based on the asset
value of the company or fund under management averaged
over a specified period and increasing and decreasing proportionately
with the investment performance of the company or
fund over a specified period in relation to the investment
record of an appropriate index of securities prices or such other
measure of investment performance as the Commission by
rule, regulation, or order may specify;
(3) apply with respect to any investment advisory contract
between an investment adviser and a business development
company, as defined in this title, if (A) the compensation provided
for in such contract does not exceed 20 per centum of the
realized capital gains upon the funds of the business development
company over a specified period or as of definite dates,
computed net of all realized capital losses and unrealized capital
depreciation, and the condition of section 61(a)(3)(B)(iii) of
title I of this Act is satisfied, and (B) the business development
company does not have outstanding any option, warrant, or
right issued pursuant to section 61(a)(3)(B) of title I of this Act
and does not have a profit-sharing plan described in section
57(n) of title I of this Act;
Sec. 206 INVESTMENT ADVISERS ACT OF 1940 20
1 So in law. Probably should include ‘‘or’’ after the semicolon at the end.
(4) apply to an investment advisory contract with a company
excepted from the definition of an investment company
under section 3(c)(7) of title I of this Act; or
(5) apply to an investment advisory contract with a person
who is not a resident of the United States.
(c) For purposes of paragraph (2) of subsection (b), the point
from which increases and decreases in compensation are measured
shall be the fee which is paid or earned when the investment performance
of such company or fund is equivalent to that of the index
or other measure of performance, and an index of securities prices
shall be deemed appropriate unless the Commission by order shall
determine otherwise.
(d) As used in paragraphs (2) and (3) of subsection (a), ‘‘investment
advisory contract’’ means any contract or agreement whereby
a person agrees to act as investment adviser to or to manage any
investment or trading account of another person other than an
investment company registered under title I of this Act.
(e) The Commission, by rule or regulation, upon its own motion,
or by order upon application, may conditionally or unconditionally
exempt any person or transaction, or any class or classes
of persons or transactions, from subsection (a)(1), if and to the extent
that the exemption relates to an investment advisory contract
with any person that the Commission determines does not need the
protections of subsection (a)(1), on the basis of such factors as
financial sophistication, net worth, knowledge of and experience in
financial matters, amount of assets under management,
relationship with a registered investment adviser, and such other
factors as the Commission determines are consistent with this
section.
PROHIBITED TRANSACTIONS BY REGISTERED INVESTMENT ADVISERS
SEC. 206. ø80b–6¿ It shall be unlawful for any investment adviser,
by use of the mails or any means or instrumentality of interstate
commerce, directly or indirectly—
(1) to employ any device, scheme, or artifice to defraud any
client or prospective client;
(2) to engage in any transaction, practice, or course of business
which operates as a fraud or deceit upon any client or
prospective client;
(3) acting as principal for his own account, knowingly to
sell any security to or purchase any security from a client, or
acting as broker for a person other than such client, knowingly
to effect any sale or purchase of any security for the account
of such client, without disclosing to such client in writing before
the completion of such transaction the capacity in which
he is acting and obtaining the consent of the client to such
transaction. The prohibitions of this paragraph (3) shall not
apply to any transaction with a customer of a broker or dealer
if such broker or dealer is not acting as an investment adviser
in relation to such transaction; 1
(4) to engage in any act, practice, or course of business
which is fraudulent, deceptive, or manipulative. The Commis

21 INVESTMENT ADVISERS ACT OF 1940 Sec. 209
sion shall, for the purposes of this paragraph (4) by rules and
regulations define, and prescribe means reasonably designed to
prevent, such acts, practices, and courses of business as are
fraudulent, deceptive, or manipulative.
EXEMPTIONS
SEC. 206A. ø80b–6a¿ The Commission, by rules and regulations,
upon its own motion, or by order upon application, may conditionally
or unconditionally exempt any person or transaction, or
any class or classes of persons, or transactions, from any provision
or provisions of this title or of any rule or regulation thereunder,
if and to the extent that such exemption is necessary or appropriate
in the public interest and consistent with the protection of
investors and the purposes fairly intended by the policy and provisions
of this title.
MATERIAL MISSTATEMENTS
SEC. 207. ø80b–7¿ It shall be unlawful for any person willfully
to make any untrue statement of a material fact in any registration
application or report filed with the Commission under section 203
or 204, or willfully to omit to state in any such application or report
any material fact which is required to be stated therein.
GENERAL PROHIBITIONS
SEC. 208. ø80b–8¿ (a) It shall be unlawful for any person registered
under section 203 of this title to represent or imply in any
manner whatsoever that such person has been sponsored, recommended,
or approved, or that his abilities or qualifications have
in any respect been passed upon by the United States or any
agency or any officer thereof.
(b) No provision of subsection (a) shall be construed to prohibit
a statement that a person is registered under this title or under
the Securities Exchange Act of 1934, if such statement is true in
fact and if the effect of such registration is not misrepresented.
(c) It shall be unlawful for any person registered under section
203 of this title to represent that he is an investment counsel or
to use the name ‘‘investment counsel’’ as descriptive of his business
unless (1) his or its principal business consists of acting as investment
adviser, and (2) a substantial part of his or its business consists
of rendering investment supervisory services.
(d) It shall be unlawful for any person indirectly, or through
or by any other person, to do any act or thing which it would be
unlawful for such person to do directly under the provisions of this
title or any rule or regulation thereunder.
ENFORCEMENT OF TITLE
SEC. 209. ø80b–9¿ (a) Whenever it shall appear to the Commission,
either upon complaint or otherwise, that the provisions of this
title or of any rule or regulation prescribed under the authority
thereof, have been or are about to be violated by any person, it may
in its discretion require, and in any event shall permit, such person
to file with it a statement in writing, under oath or otherwise, as
Sec. 209 INVESTMENT ADVISERS ACT OF 1940 22
to all the facts and circumstances relevant to such violation, and
may otherwise investigate all such facts and circumstances.
(b) For the purposes of any investigation or any proceeding
under this title, any member of the Commission or any officer
thereof designated by it is empowered to administer oaths and
affirmations, subpena witnesses, compel their attendance, take evidence,
and require the production of any books, papers, correspondence,
memoranda, contracts, agreements, or other records which
are relevant or material to the inquiry. Such attendance of witnesses
and the production of any such records may be required
from any place in any State or in any Territory or other place subject
to the jurisdiction of the United States at any designated place
of hearing.
(c) In case of contumacy by, or refusal to obey a subpena issued
to, any person, the Commission may invoke the aid of any court of
the United States within the jurisdiction of which such investigation
or proceeding is carried on, or where such person resides or
carries on business, in requiring the attendance and testimony of
witnesses and the production of books, papers, correspondence,
memoranda, contracts, agreements, and other records. And such
court may issue an order requiring such person to appear before
the Commission or member or officer designated by the Commission,
there to produce records, if so ordered or to give testimony
touching the matter under investigation or in question; and any
failure to obey such order of the court may be punished by such
court as a contempt thereof. All process in any such case may be
served in the judicial district whereof such person is an inhabitant
or wherever he may be found. Any person who without just cause
shall fail or refuse to attend and testify or to answer any lawful
inquiry or to produce books, papers, correspondence, memoranda,
contracts, agreements, or other records, if in his or its power so to
do, in obedience to the subpena of the Commission, shall be guilty
of a misdemeanor, and upon conviction shall be subject to a fine
of not more than $1,000 or to imprisonment for a term of not more
than one year, or both.
(d) Whenever it shall appear to the Commission that any person
has engaged, is engaged, or is about to engage in any act or
practice constituting a violation of any provision of this title, or of
any rule, regulation, or order hereunder, or that any person has
aided, abetted, counseled, commanded, induced, or procured, is aiding,
abetting, counseling, commanding, inducing, or procuring, or is
about to aid, abet, counsel, command, induce, or procure such a violation,
it may in its discretion bring an action in the proper district
court of the United States, or the proper United States court of any
Territory or other place subject to the jurisdiction of the United
States, to enjoin such acts or practices and to enforce compliance
with this title or any rule, regulation, or order hereunder. Upon a
showing that such person has engaged, is engaged, or is about to
engage in any such act or practice, or in aiding, abetting, counseling,
commanding, inducing, or procuring any such act or practice,
a permanent or temporary injunction or decree or restraining
order shall be granted without bond. The Commission may transmit
such evidence as may be available concerning any violation of
the provisions of this title, or of any rule, regulation, or order
23 INVESTMENT ADVISERS ACT OF 1940 Sec. 209
thereunder, to the Attorney General, who, in his discretion, may institute
the appropriate criminal proceedings under this title.
(e) MONEY PENALTIES IN CIVIL ACTIONS.—
(1) AUTHORITY OF COMMISSION.—Whenever it shall appear
to the Commission that any person has violated any provision
of this title, the rules or regulations thereunder, or a ceaseand-
desist order entered by the Commission pursuant to section
203(k) of this title, the Commission may bring an action
in a United States district court to seek, and the court shall
have jurisdiction to impose, upon a proper showing, a civil penalty
to be paid by the person who committed such violation.
(2) AMOUNT OF PENALTY.—
(A) FIRST TIER.—The amount of the penalty shall be
determined by the court in light of the facts and circumstances.
For each violation, the amount of the penalty
shall not exceed the greater of (i) $5,000 for a natural person
or $50,000 for any other person, or (ii) the gross
amount of pecuniary gain to such defendant as a result of
the violation.
(B) SECOND TIER.—Notwithstanding subparagraph (A),
the amount of penalty for each such violation shall not exceed
the greater of (i) $50,000 for a natural person or
$250,000 for any other person, or (ii) the gross amount of
pecuniary gain to such defendant as a result of the violation,
if the violation described in paragraph (1) involved
fraud, deceit, manipulation, or deliberate or reckless disregard
of a regulatory requirement.
(C) THIRD TIER.—Notwithstanding subparagraphs (A)
and (B), the amount of penalty for each such violation
shall not exceed the greater of (i) $100,000 for a natural
person or $500,000 for any other person, or (ii) the gross
amount of pecuniary gain to such defendant as a result of
the violation, if—
(I) the violation described in paragraph (1) involved
fraud, deceit, manipulation, or deliberate or
reckless disregard of a regulatory requirement; and
(II) such violation directly or indirectly resulted in
substantial losses or created a significant risk of substantial
losses to other persons.
(3) PROCEDURES FOR COLLECTION.—
(A) PAYMENT OF PENALTY TO TREASURY.—A penalty
imposed under this section shall be payable into the Treasury
of the United States, except as otherwise provided in
section 308 of the Sarbanes-Oxley Act of 2002.
(B) COLLECTION OF PENALTIES.—If a person upon
whom such a penalty is imposed shall fail to pay such penalty
within the time prescribed in the court’s order, the
Commission may refer the matter to the Attorney General
who shall recover such penalty by action in the appropriate
United States district court.
(C) REMEDY NOT EXCLUSIVE.—The actions authorized
by this subsection may be brought in addition to any other
action that the Commission or the Attorney General is
entitled to bring.
Sec. 210 INVESTMENT ADVISERS ACT OF 1940 24
(D) JURISDICTION AND VENUE.—For purposes of section
214 of this title, actions under this paragraph shall be actions
to enforce a liability or a duty created by this title.
(4) SPECIAL PROVISIONS RELATING TO A VIOLATION OF A
CEASE-AND-DESIST ORDER.—In an action to enforce a cease-anddesist
order entered by the Commission pursuant to section
203(k), each separate violation of such order shall be a separate
offense, except that in the case of a violation through a
continuing failure to comply with the order, each day of the
failure to comply shall be deemed a separate offense.
PUBLICITY
SEC. 210. ø80b–10¿ (a) The information contained in any registration
application or report or amendment thereto filed with the
Commission pursuant to any provision of this title shall be made
available to the public, unless and except insofar as the Commission,
by rules and regulations upon its own motion, or by order
upon application, finds that public disclosure is neither necessary
nor appropriate in the public interest or for the protection of investors.
Photostatic or other copies of information contained in documents
filed with the Commission under this title and made available
to the public shall be furnished to any person at such reasonable
charge and under such reasonable limitations as the Commission
shall prescribe.
(b) Subject to the provisions of subsections (c) and (d) of section
209 of this title and section 24(c) of the Securities Exchange Act
of 1934, the Commission, or any member, officer, or employee
thereof, shall not make public the fact that any examination or
investigation under this title is being conducted, or the results of
or any facts ascertained during any such examination or investigation;
and no member, officer, or employee of the Commission shall
disclose to any person other than a member, officer, or employee
of the Commission any information obtained as a result of any such
examination or investigation except with the approval of the Commission.
The provisions of this subsection shall not apply—
(1) in the case of any hearing which is public under the
provisions of section 212; or
(2) in the case of a resolution or request from either House
of Congress.
(c) No provision of this title shall be construed to require, or
to authorize the Commission to require any investment adviser engaged
in rendering investment supervisory services to disclose the
identity, investments, or affairs of any client of such investment
adviser, except insofar as such disclosure may be necessary or
appropriate in a particular proceeding or investigation having as
its object the enforcement of a provision or provisions of this title.
SEC. 210A. ø80b–10a¿ CONSULTATION.
(a) EXAMINATION RESULTS AND OTHER INFORMATION.—
(1) The appropriate Federal banking agency shall provide
the Commission upon request the results of any examination,
reports, records, or other information to which such agency
may have access—
25 INVESTMENT ADVISERS ACT OF 1940 Sec. 211
(A) with respect to the investment advisory activities
of any—
(i) bank holding company;
(ii) bank; or
(iii) separately identifiable department or division
of a bank,
that is registered under section 203 of this title; and
(B) in the case of a bank holding company or bank
that has a subsidiary or a separately identifiable department
or division registered under that section, with respect
to the investment advisory activities of such bank or
bank holding company.
(2) The Commission shall provide to the appropriate Federal
banking agency upon request the results of any examination,
reports, records, or other information with respect to the
investment advisory activities of any bank holding company,
bank, or separately identifiable department or division of a
bank, which is registered under section 203 of this title.
(3) Notwithstanding any other provision of law, the Commission
and the appropriate Federal banking agencies shall
not be compelled to disclose any information provided under
paragraph (1) or (2). Nothing in this paragraph shall authorize
the Commission or such agencies to withhold information from
Congress, or prevent the Commission or such agencies from
complying with a request for information from any other Federal
department or agency or any self-regulatory organization
requesting the information for purposes within the scope of its
jurisdiction, or complying with an order of a court of the
United States in an action brought by the United States, the
Commission, or such agencies. For purposes of section 552 of
title 5, United States Code, this paragraph shall be considered
a statute described in subsection (b)(3)(B) of such section 552.
(b) EFFECT ON OTHER AUTHORITY.—Nothing in this section
shall limit in any respect the authority of the appropriate Federal
banking agency with respect to such bank holding company (or
affiliates or subsidiaries thereof), bank, or subsidiary, department,
or division or a bank under any other provision of law.
(c) DEFINITION.—For purposes of this section, the term ‘‘appropriate
Federal banking agency’’ shall have the same meaning as
given in section 3 of the Federal Deposit Insurance Act.
RULES, REGULATIONS, AND ORDERS
SEC. 211. ø80b–11¿ (a) The Commission shall have authority
from time to time to make, issue, amend, and rescind such rules
and regulations and such orders as are necessary or appropriate to
the exercise of the functions and powers conferred upon the Commission
elsewhere in this title. For the purposes of its rules or regulations
the Commission may classify persons and matters within
its jurisdiction and prescribe different requirements for different
classes of persons or matters.
(b) Subject to the provisions of chapter 15 of title 44, United
States Code, and regulations prescribed under the authority
thereof, the rules and regulations of the Commission under this
title, and amendments thereof, shall be effective upon publication
Sec. 212 INVESTMENT ADVISERS ACT OF 1940 26
in the manner which the Commission shall prescribe, or upon such
later date as may be provided in such rules and regulations.
(c) Orders of the Commission under this title shall be issued
only after appropriate notice and opportunity for hearing. Notice to
the parties to a proceeding before the Commission shall be given
by personal service upon each party or by registered mail or certified
mail or confirmed telegraphic notice to the party’s last known
business address. Notice to interested persons, if any, other than
parties may be given in the same manner or by publication in the
Federal Register.
(d) No provision of this title imposing any liability shall apply
to any act done or omitted in good faith in conformity with any
rule, regulation, or order of the Commission, notwithstanding that
such rule, regulation, or order may, after such act or omission, be
amended or rescinded or be determined by judicial or other authority
to be invalid for any reason.
HEARINGS
SEC. 212. ø80b–12¿ Hearings may be public and may be held
before the Commission, any member or members thereof, or any officer
or officers of the Commission designated by it, and appropriate
records thereof shall be kept.
COURT REVIEW OF ORDERS
SEC. 213. ø80b–13¿ (a) Any person or party aggrieved by an
order issued by the Commission under this title may obtain a review
of such order in the court of appeals of the United States
within any circuit wherein such person resides or has his principal
place of business, or in the United States Court of Appeals for the
District of Columbia, by filing in such court, within sixty days after
the entry of such order, a written petition praying that the order
of the Commission be modified or set aside in whole or in part. A
copy of such petition shall be forthwith transmitted by the clerk of
the court to any member of the Commission, or any officer thereof
designated by the Commission for that purpose, and thereupon the
Commission shall file in the court the record upon which the order
complained of was entered, as provided in section 2112 of title 28,
United States Code. Upon the filing of such petition such court
shall have jurisdiction, which upon the filing of the record shall be
exclusive, to affirm, modify, or set aside such order, in whole or in
part. No objection to the order of the Commission shall be considered
by the court unless such objection shall have been urged before
the Commission or unless there were reasonable grounds for
failure so to do. The findings of the Commission as to the facts, if
supported by substantial evidence, shall be conclusive. If application
is made to the court for leave to adduce additional evidence,
and it is shown to the satisfaction of the court that such additional
evidence is material and that there were reasonable grounds for
failure to adduce such evidence in the proceeding before the Commission,
the court may order such additional evidence to be taken
before the Commission and to be adduced upon the hearing in such
manner and upon such terms and conditions as to the court may
seem proper. The Commission may modify its findings as to the
27 INVESTMENT ADVISERS ACT OF 1940 Sec. 215
facts by reason of the additional evidence so taken, and it shall file
with the court such modified or new findings, which, if supported
by substantial evidence, shall be conclusive, and its recommendation,
if any, for the modification or setting aside of the original
order. The judgment and decree of the court affirming, modifying,
or setting aside, in whole or in part, any such order of the Commission
shall be final, subject to review by the Supreme Court of the
United States upon certiorari or certification as provided in section
1254 of title 28, United States Code.
(b) The commencement of proceedings under subsection (a)
shall not, unless specifically ordered by the court, operate as a stay
of the Commission’s order.
JURISDICTION OF OFFENSES AND SUITS
SEC. 214. ø80b–14¿ The district courts of the United States
and the United States courts of any Territory or other place subject
to the jurisdiction of the United States shall have jurisdiction of
violations of this title or the rules, regulations, or orders thereunder,
and, concurrently with State and Territorial courts, of all
suits in equity and actions at law brought to enforce any liability
or duty created by, or to enjoin any violation of this title or the
rules, regulations, or orders thereunder. Any criminal proceeding
may be brought in the district wherein any act or transaction constituting
the violation occurred. Any suit or action to enforce any
liability or duty created by, or to enjoin any violation of this title
or rules, regulations, or orders thereunder, may be brought in any
such district or in the district wherein the defendant is an inhabitant
or transacts business, and process in such cases may be
served in any district of which the defendant is an inhabitant or
transacts business or wherever the defendant may be found. Judgments
and decrees so rendered shall be subject to review as provided
in sections 1254, 1291, 1292, and 1294 of title 28, United
States Code. No costs shall be assessed for or against the Commission
in any proceeding under this title brought by or against the
Commission in any court.
VALIDITY OF CONTRACTS
SEC. 215. ø80b–15¿ (a) Any condition, stipulation, or provision
binding any person to waive compliance with any provision of this
title or with any rule, regulation, or order thereunder shall be void.
(b) Every contract made in violation of any provision of this
title and every contract heretofore or hereafter made, the performance
of which involves the violation of, or the continuance of any
relationship or practice in violation of any provision of this title, or
any rule, regulation, or order thereunder, shall be void (1) as regards
the rights of any person who, in violation of any such provision,
rule, regulation, or order, shall have made or engaged in the
performance of any such contract, and (2) as regards the rights of
any person who, not being a party to such contract, shall have acquired
any right thereunder with actual knowledge of the facts by
reason of which the making or performance of such contract was
in violation of any such provision.
Sec. 216 INVESTMENT ADVISERS ACT OF 1940 28
1 See also 18 U.S.C. 3571. [Printed in appendix to this volume.]
ANNUAL REPORTS OF COMMISSION
SEC. 216. ø80b–16¿ The Commission shall submit annually a
report to the Congress covering the work of the Commission for the
preceding year and including such information, data, and recommendations
for further legislation in connection with the matters
covered by this title as it may find advisable.
PENALTIES 1
SEC. 217. ø80b–17¿ Any person who willfully violates any provision
of this title, or any rule, regulation, or order promulgated by
the Commission under authority thereof, shall, upon conviction, be
fined not more than $10,000, imprisoned for not more than five
years, or both.
HIRING AND LEASING AUTHORITY OF THE COMMISSION
SEC. 218. ø80b–18¿ The provisions of section 4(b) of the Securities
Exchange Act of 1934 shall be applicable with respect to the
power of the Commission—
(1) to appoint and fix the compensation of such other employees
as may be necessary for carrying out its functions
under this title, and
(2) to lease and allocate such real property as may be necessary
for carrying out its functions under this title.
SEPARABILITY OF PROVISIONS
SEC. 219. ø80b–19¿ If any provision of this title or the application
of such provision to any person or circumstances shall be held
invalid, the remainder of the title and the application of such provision
to persons or circumstances other than those as to which it is
held invalid shall not be affected thereby.
SHORT TITLE
SEC. 220. ø80b–20¿ This title may be cited as the ‘‘Investment
Advisers Act of 1940’’.
EFFECTIVE DATE
SEC. 221. ø80b–21¿ This title shall become effective on November
1, 1940.
SEC. 222. ø80b–18a¿ STATE REGULATION OF INVESTMENT ADVISERS.
(a) JURISDICTION OF STATE REGULATORS.—Nothing in this title
shall affect the jurisdiction of the securities commissioner (or any
agency or officer performing like functions) of any State over any
security or any person insofar as it does not conflict with the provisions
of this title or the rules and regulations thereunder.
(b) DUAL COMPLIANCE PURPOSES.—No State may enforce any
law or regulation that would require an investment adviser to
maintain any books or records in addition to those required under
the laws of the State in which it maintains its principal place of
business, if the investment adviser—
29 INVESTMENT ADVISERS ACT OF 1940 Sec. 222
(1) is registered or licensed as such in the State in which
it maintains its principal place of business; and
(2) is in compliance with the applicable books and records
requirements of the State in which it maintains its principal
place of business.
(c) LIMITATION ON CAPITAL AND BOND REQUIREMENTS.—No
State may enforce any law or regulation that would require an
investment adviser to maintain a higher minimum net capital or
to post any bond in addition to any that is required under the laws
of the State in which it maintains its principal place of business,
if the investment adviser—
(1) is registered or licensed as such in the State in which
it maintains its principal place of business; and
(2) is in compliance with the applicable net capital or
bonding requirements of the State in which it maintains its
principal place of business.
(d) NATIONAL DE MINIMIS STANDARD.—No law of any State or
political subdivision thereof requiring the registration, licensing, or
qualification as an investment adviser shall require an investment
adviser to register with the securities commissioner of the State (or
any agency or officer performing like functions) or to comply with
such law (other than any provision thereof prohibiting fraudulent
conduct) if the investment adviser—
(1) does not have a place of business located within the
State; and
(2) during the preceding 12-month period, has had fewer
than 6 clients who are residents of that State.

6.<<SECURITIES INVESTOR PROTECTION ACT OF 1970>>:

Notes to the Reader
1. This document is extracted from Committee Print 108-B of the
Committee on Financial Services of the U.S. House of Representatives,
and was prepared at the direction of that Committee.
2. Any material contained within brackets ø ¿ is not part of the
text of the law but is inserted as an aid to the reader.
3. Citations have been included to enable the reader to locate the
same material in the United States Code (U.S.C.). These citations
are not a part of the text of the law in which they appear. For
changes after the revision date of this excerpt (September 30, 2004)
to provisions of law in this publication that have citations to the
U.S. Code, see the United States Code Classification Tables published
by the Office of the Law Revision Counsel of the House of
Representatives at http://uscode.house.gov/uscct.htm.
REVISED THROUGH SEPTEMBER 30, 2004
2
SECURITIES INVESTOR PROTECTION ACT OF 1970
(References in brackets ø ¿ are to title 15, United States Code)
AN ACT to provide greater protection for customers of registered brokers and
dealers and members of national securities exchanges.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. ø78aaa¿ SHORT TITLE, ETC.
(a) SHORT TITLE; TABLE OF CONTENTS.—This Act, with the following
table of contents, may be cited as the ‘‘Securities Investor
Protection Act of 1970’’.
TABLE OF CONTENTS
Sec. 1. Short title.
Sec. 2. Application of Securities Exchange Act of 1934.
Sec. 3. Securities Investor Protection Corporation.
Sec. 4. SIPC Fund.
Sec. 5. Protection of customers.
Sec. 6. General provisions of a liquidation proceeding.
Sec. 7. Powers and duties of trustee.
Sec. 8. Special provisions of a liquidation proceeding.
Sec. 9. SIPC advances.
Sec. 10. Direct payment procedure.
Sec. 11. SEC functions.
Sec. 12. Examining authority functions.
Sec. 13. Functions of self-regulatory organizations.
Sec. 14. Prohibited acts.
Sec. 15. Miscellaneous provisions.
Sec. 16. Definitions.
(b) SECTION HEADINGS.—Headings for sections and subsections,
and the table of contents, are included only for convenience, and
shall be given no legal effect.
SEC. 2. ø78bbb¿ APPLICATION OF SECURITIES EXCHANGE ACT OF 1934.
Except as otherwise provided in this Act, the provisions of the
Securities Exchange Act of 1934 (15 U.S.C., sec. 78a and fol.; hereinafter
referred to as the ‘‘1934 Act’’) apply as if this Act constituted
an amendment to, and was included as a section of, such
Act.
SEC. 3. ø78ccc¿ SECURITIES INVESTOR PROTECTION CORPORATION.
(a) CREATION AND MEMBERSHIP.—
(1) CREATION.—There is hereby established a body corporate
to be known as the ‘‘Securities Investor Protection Corporation’’
(hereafter in this Act referred to as ‘‘SIPC’’). SIPC
shall be a nonprofit corporation and shall have succession until
dissolved by Act of the Congress. SIPC shall—
(A) not be an agency or establishment of the United
States Government; and
(B) except as otherwise provided in this Act, be subject
to, and have all the powers conferred upon a nonprofit cor3
S.I.P.A. OF 1970 Sec. 3
poration by, the District of Columbia Nonprofit Corporation
Act (D.C. Code, section 29–1001 and fol.).
(2) MEMBERSHIP.—
(A) MEMBERS OF SIPC.—SIPC shall be a membership
corporation the members of which shall be all persons registered
as brokers or dealers under section 15(b) of the
1934 Act, other than—
(i) persons whose principal business, in the determination
of SIPC, taking into account business of
affiliated entities, is conducted outside the United
States and its territories and possessions;
(ii) persons whose business as a broker or dealer
consists exclusively of (I) the distribution of shares of
registered open end investment companies or unit
investment trusts, (II) the sale of variable annuities,
(III) the business of insurance, or (IV) the business of
rendering investment advisory services to one or more
registered investment companies or insurance company
separate accounts; and
(iii) persons who are registered as a broker or
dealer pursuant to section 15(b)(11)(A) of the Securities
Exchange Act of 1934.
(B) COMMISSION REVIEW.—SIPC shall file with the
Commission a copy of any determination made pursuant to
subparagraph (A)(i). Within thirty days after the date of
such filing, or within such longer period as the Commission
may designate of not more than ninety days after
such date if it finds such longer period to be appropriate
and publishes its reasons for so finding, the Commission
shall, consistent with the public interest and the purposes
of this Act, affirm, reverse, or amend any such determination
of SIPC.
(C) ADDITIONAL MEMBERS.—SIPC shall provide by rule
that persons excluded from membership in SIPC under
subparagraph (A)(i) may become members of SIPC under
such conditions and upon such terms as SIPC shall require
by rule, taking into account such matters as the availability
of assets and the ability to conduct a liquidation if
necessary.
(D) DISCLOSURE.—Any broker or dealer excluded from
membership in SIPC under subparagraph (A)(i) shall, as
required by the Commission by rule, make disclosures of
its exclusion and other relevant information to the customers
of such broker or dealer who are living in the
United States or its territories and possessions.
(b) POWERS.—In addition to the powers granted to SIPC elsewhere
in this Act, SIPC shall have the power—
(1) to sue and be sued, complain and defend, in its corporate
name and through its own counsel, in any State, Federal,
or other court;
(2) to adopt, alter, and use a corporate seal, which shall be
judicially noticed;
Sec. 3 S.I.P.A. OF 1970 4
(3) to adopt, amend, and repeal, by its Board of Directors,
such bylaws as may be necessary or appropriate to carry out
the purposes of this Act, including bylaws relating to—
(A) the conduct of its business; and
(B) the indemnity of its directors, officers, and employees
(including any such person acting as trustee or otherwise
in connection with a liquidation proceeding) for liabilities
and expenses actually and reasonably incurred by any
such person in connection with the defense or settlement
of an action or suit if such person acted in good faith and
in a manner reasonably believed to be consistent with the
purposes of this Act.
(4) to adopt, amend, and repeal, by its Board of Directors,
such rules as may be necessary or appropriate to carry out the
purposes of this Act, including rules relating to—
(A) the definition of terms used in this Act, other than
those terms for which a definition is provided in section
16;
(B) the procedures for the liquidation of members and
direct payment procedures, including the transfer of customer
accounts, the distribution of customer property, and
the advance and payment of SIPC funds; and
(C) the exercise of all other rights and powers granted
to it by this Act;
(5) to conduct its business (including the carrying on of
operations and the maintenance of offices) and to exercise all
other rights and powers granted to it by this Act in any State
or other jurisdiction without regard to any qualification, licensing,
or other statute in such State or other jurisdiction;
(6) to lease, purchase, accept gifts or donations of or otherwise
acquire, to own, hold, improve, use, or otherwise deal in
or with, and to sell, convey, mortgage, pledge, lease, exchange
or otherwise dispose of, any property, real, personal or mixed,
or any interest therein, wherever situated;
(7) subject to the provisions of subsection (c), to elect or appoint
such officers, attorneys, employees, and agents as may be
required, to determine their qualifications, to define their duties,
to fix their salaries, require bonds for them and fix the
penalty thereof;
(8) to enter into contracts, to execute instruments, to incur
liabilities, and to do any and all other acts and things as may
be necessary or incidental to the conduct of its business and
the exercise of all other rights and powers granted to SIPC by
this Act; and
(9) by bylaw, to establish its fiscal year.
(c) BOARD OF DIRECTORS.—
(1) FUNCTIONS.—SIPC shall have a Board of Directors
which, subject to the provisions of this Act, shall determine the
policies which shall govern the operations of SIPC.
(2) NUMBER AND APPOINTMENT.—The Board of Directors
shall consist of seven persons as follows:
(A) One director shall be appointed by the Secretary of
the Treasury from among the officers and employees of the
Department of the Treasury.
5 S.I.P.A. OF 1970 Sec. 3
(B) One director shall be appointed by the Federal Reserve
Board from among the officers and employees of the
Federal Reserve Board.
(C) Five directors shall be appointed by the President,
by and with the advice and consent of the Senate, as
follows—
(i) three such directors shall be selected from
among persons who are associated with, and representative
of different aspects of, the securities industry,
not all of whom shall be from the same geographical
area of the United States, and
(ii) two such directors shall be selected from the
general public from among persons who are not associated
with a broker or dealer or associated with a member
of a national securities exchange, within the
meaning of section 3(a)(18) or section 3(a)(21), respectively,
of the 1934 Act, or similarly associated with
any self-regulatory organization or other securities industry
group, and who have not had any such association
during the two years preceding appointment.
(3) CHAIRMAN AND VICE CHAIRMAN.—The President shall
designate a Chairman and Vice Chairman from among those
directors appointed under paragraph (2)(C)(ii) of this subsection.
(4) TERMS.—
(A) Except as provided in subparagraphs (B) and (C),
each director shall be appointed for a term of three years.
(B) Of the directors first appointed under paragraph
(2)—
(i) two shall hold office for a term expiring on December
31, 1971,
(ii) two shall hold office for a term expiring on December
31, 1972, and
(iii) three shall hold office for a term expiring on
December 31, 1973,
as designated by the President at the time they take office.
Such designation shall be made in a manner which will assure
that no two persons appointed under the authority of
the same clause of paragraph (2)(C) shall have terms
which expire simultaneously.
(C) A vacancy in the Board shall be filled in the same
manner as the original appointment was made. Any director
appointed to fill a vacancy occurring prior to the expiration
of the term for which his predecessor was appointed
shall be appointed only for the remainder of such term. A
director may serve after the expiration of his term until
his successor has taken office.
(5) COMPENSATION.—All matters relating to compensation
of directors shall be as provided in the bylaws of SIPC.
(d) MEETINGS OF BOARD.—The Board of Directors shall meet at
the call of its Chairman, or as otherwise provided by the bylaws
of SIPC.
(e) BYLAWS AND RULES.—
Sec. 3 S.I.P.A. OF 1970 6
(1) PROPOSED BYLAW CHANGES.—The Board of Directors of
SIPC shall file with the Commission a copy of any proposed
bylaw or any proposed amendment to or repeal of any bylaw
of SIPC (hereinafter in this paragraph collectively referred to
as a ‘‘proposed bylaw change’’), accompanied by a concise general
statement of the basis and purpose of such proposed bylaw
change. Each such proposed bylaw change shall take effect
thirty days after the date of the filing of a copy thereof with
the Commission, or upon such later date as SIPC may designate
or such earlier date as the Commission may determine,
unless—
(A) the Commission, by notice to SIPC setting forth
the reasons therefor, disapproves such proposed bylaw
change as being contrary to the public interest or contrary
to the purposes of this Act; or
(B) the Commission finds that such proposed bylaw
change involves a matter of such significant public interest
that public comment should be obtained, in which case it
may, after notifying SIPC in writing of such finding, require
that the procedures set forth in paragraph (2) be followed
with respect to such proposed bylaw change, in the
same manner as if such proposed bylaw change were a
proposed rule change within the meaning of such paragraph.
(2) PROPOSED RULE CHANGES.—
(A) FILING OF PROPOSED RULE CHANGES.—The Board of
Directors of SIPC shall file with the Commission, in
accordance with such rules as the Commission may prescribe,
a copy of any proposed rule or any proposed amendment
to or repeal of any rule of SIPC (hereinafter in this
subsection collectively referred to as a ‘‘proposed rule
change’’), accompanied by a concise general statement of
the basis and purpose of such proposed rule change. The
Commission shall, upon the filing of any proposed rule
change, publish notice thereof, together with the terms of
substance of such proposed rule change or a description of
the subjects and issues involved. The Commission shall
give interested persons an opportunity to submit written
data, views, and arguments with respect to such proposed
rule change. No proposed rule change shall take effect unless
approved by the Commission or otherwise permitted
in accordance with the provisions of this paragraph.
(B) ACTION BY THE COMMISSION.—Within thirty-five
days after the date of publication of notice of the filing of
a proposed rule change, or within such longer period as
the Commission may designate of not more than ninety
days after such date if it finds such longer period to be
appropriate and publishes its reasons for so finding, or as
to which SIPC consents, the Commission shall—
(i) by order approve such proposed rule change; or
(ii) institute proceedings to determine whether
such proposed rule change should be disapproved.
(C) PROCEEDINGS.—Proceedings instituted with respect
to a proposed rule change pursuant to subparagraph
7 S.I.P.A. OF 1970 Sec. 3
(B)(ii) shall include notice of the grounds for disapproval
under consideration and opportunity for hearing, and shall
be concluded within one hundred eighty days after the
date of publication of notice of the filing of such proposed
rule change. At the conclusion of such proceedings, the
Commission shall, by order, approve or disapprove such
proposed rule change. The Commission may extend the
time for conclusion of such proceedings for not more than
sixty days if it finds good cause for such extension and
publishes its reasons for so finding, or for such longer period
as to which SIPC consents.
(D) GROUNDS FOR APPROVAL OR DISAPPROVAL.—The
Commission shall approve a proposed rule change if it
finds that such proposed rule change is in the public interest
and is consistent with the purposes of this Act, and any
proposed rule change so approved shall be given force and
effect as if promulgated by the Commission. The Commission
shall disapprove a proposed rule change if it does not
make the finding referred to in the preceding sentence.
The Commission shall not approve any proposed rule
change prior to thirty days after the date of publication of
notice of the filing thereof, unless the Commission finds
good cause for so doing and publishes its reasons for so
finding.
(E) EXCEPTION.—Notwithstanding any other provision
of this paragraph, a proposed rule change may take
effect—
(i) upon the date of filing with the Commission, if
such proposed rule change is designated by SIPC as
relating solely to matters which the Commission, consistent
with the public interest and the purposes of
this subsection, determines by rule do not require the
procedures set forth in this paragraph; or
(ii) upon such date as the Commission shall for
good cause determine. Any proposed rule change
which takes effect under this clause shall be filed
promptly thereafter and reviewed in accordance with
the provisions of subparagraph (A).
At any time within sixty days after the date of filing of any
rule change which has taken effect pursuant to this subparagraph,
the Commission may summarily abrogate such
rule change and require that it be refiled and reviewed in
accordance with the provisions of this paragraph, if the
Commission finds that such action is necessary or appropriate
in the public interest, for the protection of investors,
or otherwise in furtherance of the purposes of this Act.
Any action of the Commission pursuant to the preceding
sentence shall not affect the validity or force of a rule
change during the period it was in effect and shall not be
reviewable under section 25 of the 1934 Act or deemed to
be final agency action for purposes of section 704 of title
5, United States Code.
(3) ACTION REQUIRED BY COMMISSION.—The Commission
may, by such rules as it determines to be necessary or approSec.
4 S.I.P.A. OF 1970 8
priate in the public interest or to carry out the purposes of this
Act, require SIPC to adopt, amend, or repeal any SIPC bylaw
or rule, whenever adopted.
SEC. 4. ø78ddd¿ SIPC FUND.
(a) IN GENERAL.—
(1) ESTABLISHMENT OF FUND.—SIPC shall establish an
‘‘SIPC Fund’’ (hereinafter in this Act referred to as the ‘‘fund’’).
All amounts received by SIPC (other than amounts paid directly
to any lender pursuant to any pledge securing a borrowing
by SIPC) shall be deposited in the fund, and all expenditures
made by SIPC shall be made out of the fund.
(2) BALANCE OF THE FUND.—Except as otherwise provided
in this section, the balance of the fund at any time shall consist
of the aggregate at such time of the following items:
(A) Cash on hand or on deposit.
(B) Amounts invested in United States Government or
agency securities.
(C) Such confirmed lines of credit as SIPC may from
time to time maintain, other than those maintained pursuant
to paragraph (4).
(3) CONFIRMED LINES OF CREDIT.—For purposes of this section,
the amount of confirmed lines of credit as of any time is
the aggregate amount which SIPC at such time has the right
to borrow from banks and other financial institutions under
confirmed lines of credit or other written agreements which
provide that moneys so borrowed are to be repayable by SIPC
not less than one year from the time of such borrowings (including,
for purposes of determining when such moneys are
repayable, all rights of extension, refunding, or renewal at the
election of SIPC).
(4) OTHER LINES.—SIPC may maintain such other confirmed
lines of credit as it considers necessary or appropriate,
and such other confirmed lines of credit shall not be included
in the balance of the fund, but amounts received from such
lines of credit may be disbursed by SIPC under this Act as
though such amounts were part of the fund.
(b) INITIAL REQUIRED BALANCE FOR FUND.—Within one hundred
and twenty days from the date of enactment of this Act, the
balance of the fund shall aggregate not less than $75,000,000, less
any amounts expended from the fund within that period.
(c) ASSESSMENTS.—
(1) INITIAL ASSESSMENTS.—Each member of SIPC shall pay
to SIPC, or the collection agent for SIPC specified in section
9(a), on or before the one hundred and twentieth day following
the date of enactment of this Act, an assessment equal to oneeighth
of 1 per centum of the gross revenues from the securities
business of such member during the calendar year 1969,
or if the Commission shall determine that, for purposes of
assessment pursuant to this paragraph, a lesser percentage of
gross revenues from the securities business is appropriate for
any class or classes of members (taking into account relevant
factors, including but not limited to types of business done and
nature of securities sold), such lesser percentages as the Com9
S.I.P.A. OF 1970 Sec. 4
mission, by rule or regulation, shall establish for such class or
classes, but in no event less than one-sixteenth of 1 per centum
for any such class. In no event shall any assessment upon a
member pursuant to this paragraph be less than $150.
(2) GENERAL ASSESSMENT AUTHORITY.—SIPC shall, by
bylaw, impose upon its members such assessments as, after
consultation with self-regulatory organizations, SIPC may
deem necessary and appropriate to establish and maintain the
fund and to repay any borrowings by SIPC. Any assessments
so made shall be in conformity with contractual obligations
made by SIPC in connection with any borrowing incurred by
SIPC. Subject to paragraph (3) and subsection (d)(1)(A), any
such assessment upon the members, or any one or more classes
thereof, may, in whole or in part, be based upon or measured
by (A) the amount of their gross revenues from the securities
business, or (B) all or any of the following factors: the amount
or composition of their gross revenues from the securities business,
the number or dollar volume of transactions effected by
them, the number of customer accounts maintained by them or
the amounts of cash and securities in such accounts, their net
capital, the nature of their activities (whether in the securities
business or otherwise) and the consequent risks, or other relevant
factors.
(3) LIMITATIONS.—Notwithstanding any other provision of
this Act—
(A) no assessment shall be made upon a member otherwise
than pursuant to paragraph (1) or (2) of this subsection,
(B) an assessment may be made under paragraph (2)
of this subsection at a rate in excess of one-half of one per
centum during any twelve-month period if SIPC determines,
in accordance with a bylaw, that such rate of
assessment during such period will not have a material adverse
effect on the financial condition of its members or
their customers, except that no assessments shall be made
pursuant to such paragraph upon a member which require
payments during any such period which exceed in the
aggregate one per centum of such member’s gross revenues
from the securities business for such period, and
(C) no assessment shall include any charge based
upon the member’s activities (i) in the distribution of
shares of registered open end investment companies or
unit investment trusts, (ii) in the sale of variable annuities,
(iii) in the business of insurance, or (iv) in the business
of rendering investment advisory services to one or
more registered investment companies or insurance company
separate accounts.
(d) REQUIREMENTS RESPECTING ASSESSMENTS AND LINES OF
CREDIT.—
(1) ASSESSMENTS.—
(A) 1⁄2 OF 1 PERCENT ASSESSMENT.—Subject to subsection
(c)(3), SIPC shall impose upon each of its members
an assessment at a rate of not less than one-half of 1 per
Sec. 4 S.I.P.A. OF 1970 10
centum per annum of the gross revenues from the securities
business of such member—
(i) until the balance of the fund aggregates not
less than $150,000,000 (or such other amount as the
Commission may determine in the public interest),
(ii) during any period when there is outstanding
borrowing by SIPC pursuant to subsection (f) or subsection
(g) of this section, and
(iii) whenever the balance of the fund (exclusive of
confirmed lines of credit) is below $100,000,000 (or
such other amount as the Commission may determine
in the public interest).
(B) 1⁄4 OF 1 PERCENT ASSESSMENT.—During any period
during which—
(i) the balance of the fund (exclusive of confirmed
lines of credit) aggregates less than $150,000,000 (or
such other amount as the Commission has determined
under paragraph (2)(B)), or
(ii) SIPC is required under paragraph (2)(B) to
phase out of the fund all confirmed lines of credit,
SIPC shall endeavor to make assessments in such a manner
that the aggregate assessments payable by its members
during such period shall not be less than one-fourth
of 1 per centum per annum of the aggregate gross revenues
from the securities business for such members during
such period.
(C) MINIMUM ASSESSMENT.—The minimum assessment
imposed upon each member of SIPC shall be $25 per
annum through the year ending December 31, 1979, and
thereafter shall be the amount from time to time set by
SIPC bylaw, but in no event shall the minimum assessment
be greater than $150 per annum.
(2) LINES OF CREDIT.—
(A) $50,000,000 LIMIT AFTER 1973.—After December 31,
1973, confirmed lines of credit shall not constitute more
than $50,000,000 of the balance of the fund.
(B) PHASEOUT REQUIREMENT.—When the balance of
the fund aggregates $150,000,000 (or such other amount
as the Commission may determine in the public interest)
SIPC shall phase out of the fund all confirmed lines of
credit.
(e) PRIOR TRUSTS; OVERPAYMENTS AND UNDERPAYMENTS.—
(1) PRIOR TRUSTS.—There may be contributed and transferred
at any time to SIPC any funds held by any trust established
by a self-regulatory organization prior to January 1,
1970, and the amounts so contributed and transferred shall be
applied, as may be determined by SIPC with approval of the
Commission, as a reduction in the amounts payable pursuant
to assessments made or to be made by SIPC upon members of
such self-regulatory organization pursuant to subsection (c)(2).
No such reduction shall be made at any time when there is
outstanding any borrowing by SIPC pursuant to subsection (g)
of this section or any borrowings under confirmed lines of
credit.

11 S.I.P.A. OF 1970 Sec. 4
(2) OVERPAYMENTS.—To the extent that any payment by a
member exceeds the maximum rate permitted by subsection (c)
of this section, the excess shall be recoverable only against future
payments by such member, except as otherwise provided
by SIPC bylaw.
(3) UNDERPAYMENTS.—If a member fails to pay when due
all or any part of an assessment made upon such member, the
unpaid portion thereof shall bear interest at such rate as may
be determined by SIPC bylaw and, in addition to such interest,
SIPC may impose such penalty charge as may be determined
by SIPC bylaw. Any such penalty charge imposed upon a SIPC
member shall not exceed 25 per centum of any unpaid portion
of the assessment. SIPC may waive such penalty charge in
whole or in part in circumstances where it considers such
waiver appropriate.
(f) BORROWING AUTHORITY.—SIPC shall have the power to borrow
moneys and to evidence such borrowed moneys by the issuance
of bonds, notes, or other evidences of indebtedness, all upon such
terms and conditions as the Board of Directors may determine in
the case of a borrowing other than pursuant to subsection (g) of
this section, or as may be prescribed by the Commission in the case
of a borrowing pursuant to subsection (g). The interest payable on
a borrowing pursuant to subsection (g) shall be equal to the interest
payable on the related notes or other obligations issued by the
Commission to the Secretary of the Treasury. To secure the payment
of the principal of, and interest and premium, if any, on, all
bonds, notes, or other evidences of indebtedness so issued, SIPC
may make agreements with respect to the amount of future assessments
to be made upon members and may pledge all or any part
of the assets of SIPC and of the assessments made or to be made
upon members. Any such pledge of future assessments shall (subject
to any prior pledge) be valid and binding from the time that
it is made, and the assessments so pledged and thereafter received
by SIPC, or any collection agent for SIPC, shall immediately be
subject to the lien of such pledge without any physical delivery
thereof or further act, and the lien of such pledge shall be valid and
binding against all parties having claims of any kind against SIPC
or such collection agent whether pursuant to this Act, in tort, contract
or otherwise, irrespective of whether such parties have notice
thereof. During any period when a borrowing by SIPC pursuant to
subsection (g) of this section is outstanding, no pledge of any
assessment upon a member to secure any bonds, notes, or other
evidences of indebtedness issued other than pursuant to subsection
(g) of this section shall be effective as to the excess of the payments
under the assessment on such member during any twelve-month
period over one-fourth of 1 per centum of such member’s gross revenues
from the securities business for such period. Neither the instrument
by which a pledge is authorized or created, nor any statement
or other document relative thereto, need be filed or recorded
in any State or other jurisdiction. The Commission may by rule or
regulation provide for the filing of any instrument by which a
pledge or borrowing is authorized or created, but the failure to
make or any defect in any such filing shall not affect the validity
of such pledge or borrowing.
Sec. 4 S.I.P.A. OF 1970 12
(g) SEC LOANS TO SIPC.—In the event that the fund is or may
reasonably appear to be insufficient for the purposes of this Act,
the Commission is authorized to make loans to SIPC. At the time
of application for, and as a condition to, any such loan, SIPC shall
file with the Commission a statement with respect to the anticipated
use of the proceeds of the loan. If the Commission determines
that such loan is necessary for the protection of customers
of brokers or dealers and the maintenance of confidence in the
United States securities markets and that SIPC has submitted a
plan which provides as reasonable an assurance of prompt repayment
as may be feasible under the circumstances, then the Commission
shall so certify to the Secretary of the Treasury, and issue
notes or other obligations to the Secretary of the Treasury pursuant
to subsection (h). If the Commission determines that the
amount or time for payment of the assessments pursuant to such
plan would not satisfactorily provide for the repayment of such
loan, it may, by rules and regulations, impose upon the purchasers
of equity securities in transactions on national securities exchanges
and in the over-the-counter markets a transaction fee in such
amount as at any time or from time to time it may determine to
be appropriate, but not exceeding one-fiftieth of 1 per centum of the
purchase price of the securities. No such fee shall be imposed on
a transaction (as defined by rules or regulations of the Commission)
of less than $5,000. For the purposes of the next preceding
sentence, (1) the fee shall be based upon the total dollar amount
of each purchase; (2) the fee shall not apply to any purchase on a
national securities exchange or in an over-the-counter market by or
for the account of a broker or dealer registered under section 15(b)
of the 1934 Act unless such purchase is for an investment account
of such broker or dealer (and for this purpose any transfer from a
trading account to an investment account shall be deemed a purchase
at fair market value); and (3) the Commission may, by rule,
exempt any transaction in the over-the-counter markets or on any
national securities exchange where necessary to provide for the
assessment of fees on purchasers in transactions in such markets
and exchanges on a comparable basis. Such fee shall be collected
by the broker or dealer effecting the transaction for or with the
purchaser, or by such other person as provided by the Commission
by rule, and shall be paid to SIPC in the same manner as assessments
imposed pursuant to subsection (c) but without regard to the
limits on such assessments, or in such other manner as the Commission
may by rule provide.
(h) SEC NOTES ISSUED TO TREASURY.—To enable the Commission
to make loans under subsection (g), the Commission is authorized
to issue to the Secretary of the Treasury notes or other obligations
in an aggregate amount of not to exceed $1,000,000,000, in
such forms and denominations, bearing such maturities, and subject
to such terms and conditions, as may be prescribed by the Secretary
of the Treasury. Such notes or other obligations shall bear
interest at a rate determined by the Secretary of the Treasury, taking
into consideration the current average market yield on outstanding
marketable obligations of the United States of comparable
maturities during the month preceding the issuance of the notes or
other obligations. The Secretary of the Treasury may reduce the in13
S.I.P.A. OF 1970 Sec. 5
terest rate if he determines such reduction to be in the national interest.
The Secretary of the Treasury is authorized and directed to
purchase any notes and other obligations issued hereunder and for
that purpose he is authorized to use as a public debt transaction
the proceeds from the sale of any securities issued under the Second
Liberty Bond Act, as amended, and the purposes for which
securities may be issued under that Act, as amended, are extended
to include any purchase of such notes and obligations. The Secretary
of the Treasury may at any time sell any of the notes or
other obligations acquired by him under this subsection. All
redemptions, purchases, and sales by the Secretary of the Treasury
of such notes or other obligations shall be treated as public debt
transactions of the United States.
(i) CONSOLIDATED GROUP.—Except as otherwise provided by
SIPC bylaw, gross revenues from the securities business of a member
of SIPC shall be computed on a consolidated basis for such
member and all its subsidiaries (other than the foreign subsidiaries
of such member), and the operations of a member of SIPC shall include
those of any business to which such member has succeeded.
SEC. 5. ø78eee¿ PROTECTION OF CUSTOMERS.
(a) DETERMINATION OF NEED OF PROTECTION.—
(1) NOTICE TO SIPC.—If the Commission or any self-regulatory
organization is aware of facts which lead it to believe
that any broker or dealer subject to its regulation is in or is
approaching financial difficulty, it shall immediately notify
SIPC, and, if such notification is by a self-regulatory organization,
the Commission.
(2) ACTION BY SELF-REGULATORY ORGANIZATION.—If a selfregulatory
organization has given notice to SIPC pursuant to
subsection (a)(1) with respect to a broker or dealer, and such
broker or dealer undertakes to liquidate or reduce its business
either pursuant to the direction of a self-regulatory organization
or voluntarily, such self-regulatory organization may
render such assistance or oversight to such broker or dealer as
it considers appropriate to protect the interests of customers of
such broker or dealer. The assistance or oversight by a self-regulatory
organization shall not be deemed the assumption or
adoption by such self-regulatory organization of any obligation
or liability to customers, other creditors, shareholders, or partners
of the broker or dealer, and shall not prevent or act as
a bar to any action by SIPC.
(3) ACTION BY SIPC.—If SIPC determines that—
(A) any member of SIPC (including any person who
was a member within one hundred eighty days prior to
such determination) has failed or is in danger of failing to
meet its obligations to customers; and
(B) one or more of the conditions specified in subsection
(b)(1) exist with respect to such member,
SIPC may, upon notice to such member, file an application for
a protective decree with any court of competent jurisdiction
specified in section 21(e) or 27 of the 1934 Act, except that no
such application shall be filed with respect to a member the
Sec. 5 S.I.P.A. OF 1970 14
only customers of which are persons whose claims could not be
satisfied by SIPC advances pursuant to section 9.
(4) EFFECT OF OTHER PENDING ACTIONS.—An application
with respect to a member of SIPC filed with a court under
paragraph (3)—
(A) may, with the consent of the Commission, be combined
with any action brought by the Commission, including
an action by the Commission for a temporary receiver
pending an appointment of a trustee under subsection
(b)(3); and
(B) may be filed notwithstanding the pendency in the
same or any other court of any bankruptcy, mortgage foreclosure,
or equity receivership proceeding or any proceeding
to reorganize, conserve, or liquidate such member
or its property, or any proceeding to enforce a lien against
property of such member.
(b) COURT ACTION.—
(1) ISSUANCE OF PROTECTIVE DECREE.—Upon receipt of an
application by SIPC under subsection (a)(3), the court shall
forthwith issue a protective decree if the debtor consents
thereto, if the debtor fails to contest such application, or if the
court finds that such debtor—
(A) is insolvent within the meaning of section 101 of
title 11 of the United States Code, or is unable to meet its
obligations as they mature;
(B) is the subject of a proceeding pending in any court
or before any agency of the United States or any State in
which a receiver, trustee, or liquidator for such debtor has
been appointed;
(C) is not in compliance with applicable requirements
under the 1934 Act or rules of the Commission or any selfregulatory
organization with respect to financial responsibility
or hypothecation of customers’ securities; or
(D) is unable to make such computations as may be
necessary to establish compliance with such financial
responsibility or hypothecation rules.
Unless the debtor consents to the issuance of a protective decree,
the application shall be heard three business days after
the date on which it is filed, or at such other time as the court
shall determine, taking into consideration the urgency which
the circumstances require.
(2) JURISDICTION AND POWERS OF COURT.—
(A) EXCLUSIVE JURISDICTION.—Upon the filing of an
application with a court for a protective decree with respect
to a debtor, such court—
(i) shall have exclusive jurisdiction of such debtor
and its property wherever located (including property
located outside the territorial limits of such court and
property held by any other person as security for a
debt or subject to a lien);
(ii) shall have exclusive jurisdiction of any suit
against the trustee with respect to a liquidation proceeding;
and
15 S.I.P.A. OF 1970 Sec. 5
(iii) except as inconsistent with the provisions of
this Act, shall have the jurisdiction, powers, and duties
conferred upon a court of the United States having
jurisdiction over cases under title 11 of the United
States Code, together with such other jurisdiction,
powers, and duties as are prescribed by this Act.
(B) STAY OF PENDING ACTIONS.—Pending the issuance
of a protective decree under paragraph (1), the court with
which an application has been filed—
(i) shall stay any pending bankruptcy, mortgage
foreclosure, equity receivership, or other proceeding to
reorganize, conserve, or liquidate the debtor or its
property and any other suit against any receiver, conservator,
or trustee of the debtor or its property, and
shall continue such stay upon appointment of a
trustee pursuant to paragraph (3);
(ii) may stay any proceeding to enforce a lien
against property of the debtor or any other suit
against the debtor, including a suit by stockholders of
the debtor which interferes with prosecution by the
trustee of claims against former directors, officers, or
employees of the debtor, and may continue such stay
upon appointment of a trustee pursuant to paragraph
(3);
(iii) may stay enforcement of, and upon appointment
of a trustee pursuant to paragraph (3), may continue
the stay for such period of time as may be appropriate,
but shall not abrogate any right of setoff, except
to the extent such right may be affected under
section 553 of title 11 of the United States Code, and
shall not abrogate the right to enforce a valid, nonpreferential
lien or pledge against the property of the
debtor; and
(iv) may appoint a temporary receiver.
(3) APPOINTMENT OF TRUSTEE AND ATTORNEY.—If the court
issues a protective decree under paragraph (1), such court shall
forthwith appoint, as trustee for the liquidation of the business
of the debtor and as attorney for the trustee, such persons as
SIPC, in its sole discretion, specifies. The persons appointed as
trustee and as attorney for the trustee may be associated with
the same firm. SIPC may, in its sole discretion, specify itself
or one of its employees as trustee in any case in which SIPC
has determined that the liabilities of the debtor to unsecured
general creditors and to subordinated lenders appear to aggregate
less than $750,000 and that there appear to be fewer than
five hundred customers of such debtor. No person may be appointed
to serve as trustee or attorney for the trustee if such
person is not disinterested within the meaning of paragraph
(6), except that for any specified purpose other than to represent
a trustee in conducting a liquidation proceeding, the
trustee may, with the approval of SIPC and the court, employ
an attorney who is not disinterested. A trustee appointed
under this paragraph shall qualify by filing a bond in the manner
prescribed by section 322 of title 11 of the United States
Sec. 5 S.I.P.A. OF 1970 16
Code, except that neither SIPC nor any employee of SIPC shall
be required to file a bond when appointed as trustee.
(4) REMOVAL TO BANKRUPTCY COURT.—Upon the issuance
of a protective decree and appointment of a trustee, or a
trustee and counsel, under this section, the court shall forthwith
order the removal of the entire liquidation proceeding to
the court of the United States in the same judicial district having
jurisdiction over cases under title 11 of the United States
Code. The latter court shall thereupon have all of the jurisdiction,
powers, and duties conferred by this Act upon the court
to which application for the issuance of the protective decree
was made.
(5) COMPENSATION FOR SERVICES AND REIMBURSEMENT OF
EXPENSES.—
(A) ALLOWANCES IN GENERAL.—The court shall grant
reasonable compensation for services rendered and reimbursement
for proper costs and expenses incurred (hereinafter
in this paragraph referred to as ‘‘allowances’’) by a
trustee, and by the attorney for such a trustee, in connection
with a liquidation proceeding. No allowances (other
than reimbursement for proper costs and expenses incurred)
shall be granted to SIPC or any employee of SIPC
for serving as trustee. Allowances may be granted on an
interim basis during the course of the liquidation proceeding
at such times and in such amounts as the court
considers appropriate.
(B) APPLICATION FOR ALLOWANCES.—Any person seeking
allowances shall file with the court an application
which complies in form and content with the provisions of
title 11 of the United States Code governing applications
for allowances under such title. A copy of such application
shall be served upon SIPC when filed. The court shall fix
a time for a hearing on such application, and notice of
such hearing shall be given to the applicant, the trustee,
the debtor, the creditors, SIPC, and such other persons as
the court may designate, except that notice need not be
given to customers whose claims have been or will be satisfied
in full or to creditors who cannot reasonably be expected
to receive any distribution during the course of the
liquidation proceeding.
(C) RECOMMENDATIONS OF SIPC AND AWARDING OF
ALLOWANCES.—Whenever an application for allowances is
filed pursuant to subparagraph (B), SIPC shall file its recommendation
with respect to such allowances with the
court prior to the hearing on such application and shall, if
it so requests, be allowed a reasonable time after such
hearing within which to file a further recommendation. In
any case in which such allowances are to be paid by SIPC
without reasonable expectation of recoupment thereof as
provided in this Act and there is no difference between the
amounts requested and the amounts recommended by
SIPC, the court shall award the amounts recommended by
SIPC. In determining the amount of allowances in all
other cases, the court shall give due consideration to the
17 S.I.P.A. OF 1970 Sec. 5
nature, extent, and value of the services rendered, and
shall place considerable reliance on the recommendation of
SIPC.
(D) APPLICABLE RESTRICTIONS.—The restrictions on
sharing of compensation set forth in section 504 of title 11
of the United States Code shall apply to allowances.
(E) CHARGE AGAINST ESTATE.—Allowances granted by
the court, including interim allowances, shall be charged
against the general estate of the debtor as a cost and expense
of administration. If the general estate is insufficient
to pay allowances in whole or in part, SIPC shall advance
such funds as are necessary for such payment.
(6) DISINTERESTEDNESS.—
(A) STANDARDS.—For purposes of paragraph (3), a person
shall not be deemed disinterested if—
(i) such person is a creditor (including a customer),
stockholder, or partner of the debtor;
(ii) such person is or was an underwriter of any of
the outstanding securities of the debtor or within five
years prior to the filing date was the underwriter of
any securities of the debtor;
(iii) such person is, or was within two years prior
to the filing date, a director, partner, officer, or employee
of the debtor or such an underwriter, or an attorney
for the debtor or such an underwriter; or
(iv) it appears that such person has, by reason of
any other direct or indirect relationship to, connection
with, or interest in the debtor or such an underwriter,
or for any other reason, an interest materially adverse
to the interests of any class of creditors (including customers)
or stockholders.
except that SIPC shall in all cases be deemed disinterested,
and an employee of SIPC shall be deemed disinterested
if such employee would, except for his association
with SIPC, meet the standards set forth in this subparagraph.
(B) HEARING.—The court shall fix a time for a hearing
on disinterestedness, to be held promptly after the
appointment of a trustee. Notice of such hearing shall be
mailed at least ten days prior thereto to each person who,
from the books and records of the debtor appears to have
been a customer of the debtor with an open account within
the past twelve months, to the address of such person as
it appears from the books and records of the debtor, and
to the creditors and stockholders of the debtor, to SIPC,
and to such other persons as the court may designate. The
court may, in its discretion, also require that notice be
given by publication in such newspaper or newspapers of
general circulation as it may designate. At such hearing,
at any adjournment thereof, or upon application, the court
shall hear objections to the retention in office of a trustee
or attorney for a trustee on the grounds that such person
is not disinterested.
Sec. 6 S.I.P.A. OF 1970 18
(c) SEC PARTICIPATION IN PROCEEDINGS.—The Commission
may, on its own motion, file notice of its appearance in any proceeding
under this Act and may thereafter participate as a party.
(d) SIPC PARTICIPATION.—SIPC shall be deemed to be a party
in interest as to all matters arising in a liquidation proceeding,
with the right to be heard on all such matters, and shall be deemed
to have intervened with respect to all such matters with the same
force and effect as if a petition for such purpose had been allowed
by the court.
SEC. 6. ø78fff¿ GENERAL PROVISIONS OF A LIQUIDATION PROCEEDING.
(a) PURPOSES.—The purposes of a liquidation proceeding under
this Act shall be—
(1) as promptly as possible after the appointment of a
trustee in such liquidation proceeding, and in accordance with
the provisions of this Act—
(A) to deliver customer name securities to or on behalf
of the customers of the debtor entitled thereto as provided
in section 8(c)(2); and
(B) to distribute customer property and (in advance
thereof or concurrently therewith) otherwise satisfy net equity
claims of customers to the extent provided in this section;
(2) to sell or transfer offices and other productive units of
the business of the debtor;
(3) to enforce rights of subrogation as provided in this Act;
and
(4) to liquidate the business of the debtor.
(b) APPLICATION OF TITLE 11 OF THE UNITED STATES CODE.—
To the extent consistent with the provisions of this Act, a liquidation
proceeding shall be conducted in accordance with, and as
though it were being conducted under chapters 1, 3, and 5 and subchapters
I and II of chapter 7 of title 11 of the United States Code.
For the purposes of applying such title in carrying out this section,
a reference in such title to the date of the filing of the petition shall
be deemed to be a reference to the filing date under this Act.
(c) DETERMINATION OF CUSTOMER STATUS.—In a liquidation
proceeding under this Act, whenever a person has acted with respect
to cash or securities with the debtor after the filing date and
in a manner which would have given him the status of a customer
with respect to such cash or securities had the action occurred
prior to the filing date, and the trustee is satisfied that such action
was taken by the customer in good faith and prior to the appointment
of the trustee, the date on which such action was taken shall
be deemed to be the filing date for purposes of determining the net
equity of such customer with respect to such cash or securities.
(d) APPORTIONMENT.—In a liquidation proceeding under this
Act, any cash or securities remaining after the liquidation of a lien
or pledge made by a debtor shall be apportioned between his general
estate and customer property in the proportion in which the
general property of the debtor and the cash and securities of the
customers of such debtor contributed to such lien or pledge. Securities
apportioned to the general estate under this subsection shall
be subject to the provisions of section 16(5)(A).
19 S.I.P.A. OF 1970 Sec. 7
(e) COSTS AND EXPENSES OF ADMINISTRATION.—All costs and
expenses of administration of the estate of the debtor and of the
liquidation proceeding shall be borne by the general estate of the
debtor to the extent it is sufficient therefor, and the priorities of
distribution from the general estate shall be as provided in section
726 of title 11 of the United States Code. Costs and expenses of
administration shall include payments pursuant to section 8(e) and
section 9(c)(1) (to the extent such payments recovered securities
which were apportioned to the general estate pursuant to subsection
(d)) and costs and expenses of SIPC employees utilized by
the trustee pursuant to section 7(a)(2). All funds advanced by SIPC
to a trustee for such costs and expenses of administration shall be
recouped from the general estate under section 507(a)(1) of title 11
of the United States Code.
SEC. 7. ø78fff–1¿ POWERS AND DUTIES OF A TRUSTEE.
(a) TRUSTEE POWERS.—A trustee shall be vested with the same
powers and title with respect to the debtor and the property of the
debtor, including the same rights to avoid preferences, as a trustee
in a case under title 11 of the United States Code. In addition, a
trustee may, with the approval of SIPC but without any need for
court approval—
(1) hire and fix the compensation of all personnel (including
officers and employees of the debtor and of its examining
authority) and other persons (including accountants) that are
deemed by the trustee necessary for all or any purposes of the
liquidation proceeding;
(2) utilize SIPC employees for all or any purposes of a liquidation
proceeding; and
(3) margin and maintain customer accounts of the debtor
for the purposes of section 8(f).
(b) TRUSTEE DUTIES.—To the extent consistent with the provisions
of this Act or as otherwise ordered by the court, a trustee
shall be subject to the same duties as a trustee in a case under
chapter 7 of title 11 of the United States Code, including, if the
debtor is a commodity broker, as defined under section 101 of such
title, the duties specified in subchapter IV of such chapter 7, except
that a trustee may, but shall have no duty to, reduce to money any
securities constituting customer property or in the general estate
of the debtor. In addition, the trustee shall—
(1) deliver securities to or on behalf of customers to the
maximum extent practicable in satisfaction of customer claims
for securities of the same class and series of an issuer; and
(2) subject to the prior approval of SIPC but without any
need for court approval, pay or guarantee all or any part of the
indebtedness of the debtor to a bank, lender, or other person
if the trustee determines that the aggregate market value of
securities to be made available to the trustee upon the payment
or guarantee of such indebtedness does not appear to be
less than the total amount of such payment or guarantee.
(c) REPORTS BY TRUSTEE TO COURT.—The trustee shall make to
the court and to SIPC such written reports as may be required of
a trustee in a case under chapter 7 of title 11 of the United States
Code, and shall include in such reports information with respect to
Sec. 8 S.I.P.A. OF 1970 20
the progress made in distributing cash and securities to customers.
Such reports shall be in such form and detail as the Commission
determines by rule to present fairly the results of the liquidation
proceeding as of the date of or for the period covered by such reports,
having due regard for the requirements of section 17 of the
1934 Act and the rules prescribed under such section and the magnitude
of items and transactions involved in connection with the
operations of a broker or dealer.
(d) INVESTIGATIONS.—The trustee shall—
(1) as soon as practicable, investigate the acts, conduct,
property, liabilities, and financial condition of the debtor, the
operation of its business, and any other matter, to the extent
relevant to the liquidation proceeding, and report thereon to
the court;
(2) examine, by deposition or otherwise, the directors and
officers of the debtor and any other witnesses concerning any
of the matters referred to in paragraph (1);
(3) report to the court any facts ascertained by the trustee
with respect to fraud, misconduct, mismanagement, and irregularities,
and to any causes of action available to the estate;
and
(4) as soon as practicable, prepare and submit, to SIPC
and such other persons as the court designates and in such
form and manner as the court directs, a statement of his investigation
of matters referred to in paragraph (1).
SEC. 8. ø78fff–2¿ SPECIAL PROVISIONS OF A LIQUIDATION PROCEEDING.
(a) NOTICE AND CLAIMS.—
(1) NOTICE OF PROCEEDINGS.—Promptly after the appointment
of the trustee, such trustee shall cause notice of the commencement
of proceedings under this section to be published in
one or more newspapers of general circulation in the form and
manner determined by the court, and at the same time shall
cause a copy of such notice to be mailed to each person who,
from the books and records of the debtor, appears to have been
a customer of the debtor with an open account within the past
twelve months, to the address of such person as it appears
from the books and records of the debtor. Notice to creditors
other than customers shall be given in the manner prescribed
by title 11 of the United States Code, except that such notice
shall be given by the trustee.
(2) STATEMENT OF CLAIM.—A customer shall file with the
trustee a written statement of claim but need not file a formal
proof of claim, except that no obligation of the debtor to any
person associated with the debtor within the meaning of section
3(a)(18) or section 3(a)(21) of the 1934 Act, any beneficial
owner of 5 per centum or more of the voting stock of the
debtor, or any member of the immediate family of any such
person or owner may be satisfied without formal proof of claim.
(3) TIME LIMITATIONS.—No claim of a customer or other
creditor of the debtor which is received by the trustee after the
expiration of the six-month period beginning on the date of
publication of notice under paragraph (1) shall be allowed, except
that the court may, upon application within such period

21 S.I.P.A. OF 1970 Sec. 8
and for cause shown, grant a reasonable, fixed extension of
time for the filing of a claim by the United States, by a State
or political subdivision thereof, or by an infant or incompetent
person without a guardian. Any claim of a customer for net equity
which is received by the trustee after the expiration of
such period of time as may be fixed by the court (not exceeding
sixty days after the date of publication of notice under paragraph
(1)) need not be paid or satisfied in whole or in part out
of customer property, and, to the extent such claim is satisfied
from moneys advanced by SIPC, it shall be satisfied in cash or
securities (or both) as the trustee determines is most economical
to the estate.
(4) EFFECT ON CLAIMS.—Except as otherwise provided in
this section, and without limiting the powers and duties of the
trustee to discharge obligations promptly as specified in this
section, nothing in this section shall limit the right of any person,
including any subrogee, to establish by formal proof or
otherwise as the court may provide such claims as such person
may have against the debtor, including claims for the payment
of money and the delivery of specific securities, without resort
to moneys advanced by SIPC to the trustee.
(b) PAYMENTS TO CUSTOMERS.—After receipt of a written statement
of claim pursuant to subsection (a)(2), the trustee shall
promptly discharge, in accordance with the provisions of this section,
all obligations of the debtor to a customer relating to, or net
equity claims based upon, securities or cash, by the delivery of
securities or the making of payments to or for the account of such
customer (subject to the provisions of subsection (d) and section
9(a)) insofar as such obligations are ascertainable from the books
and records of the debtor or are otherwise established to the satisfaction
of the trustee. For purposes of distributing securities to customers,
all securities shall be valued as of the close of business on
the filing date. For purposes of this subsection, the court shall,
among other things—
(1) with respect to net equity claims, authorize the trustee
to satisfy claims out of moneys made available to the trustee
by SIPC notwithstanding the fact that there has not been any
showing or determination that there are sufficient funds of the
debtor available to satisfy such claims; and
(2) with respect to claims relating to, or net equities based
upon, securities of a class and series of an issuer which are ascertainable
from the books and records of the debtor or are otherwise
established to the satisfaction of the trustee, authorize
the trustee to deliver securities of such class and series if and
to the extent available to satisfy such claims in whole or in
part, with partial deliveries to be made pro rata to the greatest
extent considered practicable by the trustee.
Any payment or delivery of property pursuant to this subsection
may be conditioned upon the trustee requiring claimants to execute,
in a form to be determined by the trustee, appropriate receipts,
supporting affidavits, releases, and assignments, but shall
be without prejudice to any right of a claimant to file formal proof
of claim within the period specified in subsection (a)(3) for any balSec.
8 S.I.P.A. OF 1970 22
ance of securities or cash to which such claimant considers himself
entitled.
(c) CUSTOMER RELATED PROPERTY.—
(1) ALLOCATION OF CUSTOMER PROPERTY.—The trustee
shall allocate customer property of the debtor as follows:
(A) first, to SIPC in repayment of advances made by
SIPC pursuant to section 9(c)(1), to the extent such advances
recovered securities which were apportioned to customer
property pursuant to section 6(d);
(B) second, to customers of such debtor, who shall
share ratably in such customer property on the basis and
to the extent of their respective net equities;
(C) third, to SIPC as subrogee for the claims of customers;
(D) fourth, to SIPC in repayment of advances made by
SIPC pursuant to section 9(c)(2).
Any customer property remaining after allocation in accordance
with this paragraph shall become part of the general estate
of the debtor. To the extent customer property and SIPC
advances pursuant to section 9(a) are not sufficient to pay or
otherwise satisfy in full the net equity claims of customers,
such customers shall be entitled, to the extent only of their
respective unsatisfied net equities, to participate in the general
estate as unsecured creditors. For purposes of allocating customer
property under this paragraph, securities to be delivered
in payment of net equity claims for securities of the same class
and series of an issuer shall be valued as of the close of business
on the filing date.
(2) DELIVERY OF CUSTOMER NAME SECURITIES.—The trustee
shall deliver customer name securities to or on behalf of a customer
of the debtor entitled thereto if the customer is not indebted
to the debtor. If the customer is so indebted, such customer
may, with the approval of the trustee, reclaim customer
name securities upon payment to the trustee, within such period
of time as the trustee determines, of all indebtedness of
such customer to the debtor.
(3) RECOVERY OF TRANSFERS.—Whenever customer property
is not sufficient to pay in full the claims set forth in subparagraphs
(A) through (D) of paragraph (1), the trustee may
recover any property transferred by the debtor which, except
for such transfer, would have been customer property if and to
the extent that such transfer is voidable or void under the provisions
of title 11 of the United States Code. Such recovered
property shall be treated as customer property. For purposes
of such recovery, the property so transferred shall be deemed
to have been the property of the debtor and, if such transfer
was made to a customer or for his benefit, such customer shall
be deemed to have been a creditor, the laws of any State to the
contrary notwithstanding.
(d) PURCHASE OF SECURITIES.—The trustee shall, to the extent
that securities can be purchased in a fair and orderly market, purchase
securities as necessary for the delivery of securities to customers
in satisfaction of their claims for net equities based on securities
under section 7(b)(1) and for the transfer of customer ac23
S.I.P.A. OF 1970 Sec. 8
counts under subsection (f), in order to restore the accounts of such
customers as of the filing date. To the extent consistent with subsection
(c), customer property and moneys advanced by SIPC may
be used by the trustee to pay for securities so purchased. Moneys
advanced by SIPC for each account of a separate customer may not
be used to purchase securities to the extent that the aggregate
value of such securities on the filing date exceeded the amount permitted
to be advanced by SIPC under the provisions of section 9(a).
(e) CLOSEOUTS.—
(1) IN GENERAL.—Any contract of the debtor for the purchase
or sale of securities in the ordinary course of its business
with other brokers or dealers which is wholly executory on the
filing date shall not be completed by the trustee, except to the
extent permitted by SIPC rule. Upon the adoption by SIPC of
rules with respect to the closeout of such a contract but prior
to the adoption of rules with respect to the completion of such
a contract, the other broker or dealer shall close out such contract,
without unnecessary delay, in the best available market
and pursuant to such SIPC rules. Until such time as SIPC
adopts rules with respect to the completion or closeout of such
a contract, such a contract shall be closed out in accordance
with Commission Rule S6(d)–1 as in effect on the date of
enactment of this section, or any comparable rule of the Commission
subsequently adopted, to the extent not inconsistent
with the provisions of this subsection.
(2) NET PROFIT OR LOSS.—A broker or dealer shall net all
profits and losses on all contracts closed out under this subsection
and—
(A) if such broker or dealer shows a net profit on such
contracts, he shall pay such net profit to the trustee; and
(B) if such broker or dealer sustains a net loss on such
contracts, he shall be entitled to file a claim against the
debtor with the trustee in the amount of such net loss.
To the extent that a net loss sustained by a broker or dealer
arises from contracts pursuant to which such broker or dealer
was acting for its own customer, such broker or dealer shall be
entitled to receive funds advanced by SIPC to the trustee in
the amount of such loss, except that such broker or dealer may
not receive more than $40,000 for each separate customer with
respect to whom it sustained a loss. With respect to a net loss
which is not payable under the preceding sentence from funds
advanced by SIPC, the broker or dealer shall be entitled to
participate in the general estate as an unsecured creditor.
(3) REGISTERED CLEARING AGENCIES.—Neither a registered
clearing agency which by its rules has an established procedure
for the closeout of open contracts between an insolvent
broker or dealer and its participants, nor its participants to the
extent such participants’ claims are or may be processed
within the registered clearing agency, shall be entitled to receive
SIPC funds in payment of any losses on such contracts,
except as SIPC may otherwise provide by rule. If such registered
clearing agency or its participants sustain a net loss on
the closeout of such contracts with the debtor, they shall have
the right to participate in the general estate as unsecured
Sec. 9 S.I.P.A. OF 1970 24
creditors to the extent of such loss. Any funds or other property
owed to the debtor, after the closeout of such contracts,
shall be promptly paid to the trustee. Rules adopted by SIPC
under this paragraph shall provide that in no case may a registered
clearing agency or its participants, to the extent such
participants’ claims are or may be processed within the registered
clearing agency, be entitled to receive funds advanced
by SIPC in an amount greater, in the aggregate, than could be
received by the participants if such participants proceeded
individually under paragraphs (1) and (2).
(4) DEFINITION.—For purposes of this subsection, the term
‘‘customer’’ does not include any person who—
(A) is a broker or dealer;
(B) had a claim for cash or securities which by contract,
agreement, or understanding, or by operation of law,
was part of the capital of the claiming broker or dealer or
was subordinated to the claims of any or all creditors of
such broker or dealer; or
(C) had a relationship of the kind specified in section
9(a)(5) with the debtor.
A claiming broker or dealer shall be deemed to have been acting
on behalf of its customer if it acted as agent for such customer
or if it held such customer’s order which was to be executed
as a part of its contract with the debtor.
(f) TRANSFER OF CUSTOMER ACCOUNTS.—In order to facilitate
the prompt satisfaction of customer claims and the orderly liquidation
of the debtor, the trustee may, pursuant to terms satisfactory
to him and subject to the prior approval of SIPC, sell or otherwise
transfer to another member of SIPC, without consent of any customer,
all or any part of the account of a customer of the debtor.
In connection with any such sale or transfer to another member of
SIPC and subject to the prior approval of SIPC, the trustee may—
(1) waive or modify the need to file a written statement of
claim pursuant to subsection (a)(2); and
(2) enter into such agreements as the trustee considers
appropriate under the circumstances to indemnify any such
member of SIPC against shortages of cash or securities in the
customer accounts sold or transferred.
The funds of SIPC may be made available to guarantee or secure
any indemnification under paragraph (2). The prior approval of
SIPC to such indemnification shall be conditioned, among such
other standards as SIPC may determine, upon a determination by
SIPC that the probable cost of any such indemnification can reasonably
be expected not to exceed the cost to SIPC of proceeding
under section 9(a) and section 9(b).
SEC. 9. ø78fff–3¿ SIPC ADVANCES.
(a) ADVANCES FOR CUSTOMERS’ CLAIMS.—In order to provide
for prompt payment and satisfaction of net equity claims of customers
of the debtor, SIPC shall advance to the trustee such moneys,
not to exceed $500,000 for each customer, as may be required
to pay or otherwise satisfy claims for the amount by which the net
equity of each customer exceeds his ratable share of customer property,
except that—
25 S.I.P.A. OF 1970 Sec. 9
(1) if all or any portion of the net equity claim of a customer
in excess of his ratable share of customer property is a
claim for cash, as distinct from a claim for securities, the
amount advanced to satisfy such claim for cash shall not exceed
$100,000 for each such customer;
(2) a customer who holds accounts with the debtor in separate
capacities shall be deemed to be a different customer in
each capacity;
(3) if all or any portion of the net equity claim of a customer
in excess of his ratable share of customer property is
satisfied by the delivery of securities purchased by the trustee
pursuant to section 8(d), the securities so purchased shall be
valued as of the filing date for purposes of applying the dollar
limitations of this subsection;
(4) no advance shall be made by SIPC to the trustee to pay
or otherwise satisfy, directly or indirectly, any net equity claim
of a customer who is a general partner, officer, or director of
the debtor, a beneficial owner of five per centum or more of
any class of equity security of the debtor (other than a nonconvertible
stock having fixed preferential dividend and liquidation
rights), a limited partner with a participation of five
per centum or more in the net assets or net profits of the
debtor, or a person who, directly or indirectly and through
agreement or otherwise, exercised or had the power to exercise
a controlling influence over the management or policies of the
debtor; and
(5) no advance shall be made by SIPC to the trustee to pay
or otherwise satisfy any net equity claim of any customer who
is a broker or dealer or bank, other than to the extent that it
shall be established to the satisfaction of the trustee, from the
books and records of the debtor or from the books and records
of a broker or dealer or bank, or otherwise, that the net equity
claim of such broker or dealer or bank against the debtor arose
out of transactions for customers of such broker or dealer or
bank (which customers are not themselves a broker or dealer
or bank or a person described in paragraph (4)), in which event
each such customer of such broker or dealer or bank shall be
deemed a separate customer of the debtor.
To the extent moneys are advanced by SIPC to the trustee to pay
or otherwise satisfy the claims of customers, in addition to all other
rights it may have at law or in equity, SIPC shall be subrogated
to the claims of such customers with the rights and priorities provided
in this Act, except that SIPC as subrogee may assert no
claim against customer property until after the allocation thereof
to customers as provided in section 8(c).
(b) OTHER ADVANCES.—SIPC shall advance to the trustee—
(1) such moneys as may be required to carry out section
8(e); and
(2) to the extent the general estate of the debtor is not sufficient
to pay any and all costs and expenses of administration
of the estate of the debtor and of the liquidation proceeding,
the amount of such costs and expenses.
(c) DISCRETIONARY ADVANCES.—SIPC may advance to the
trustee such moneys as may be required to—
Sec. 10 S.I.P.A. OF 1970 26
(1) pay or guarantee indebtedness of the debtor to a bank,
lender, or other person under section 7(b)(2);
(2) guarantee or secure any indemnity under section 8(f);
and
(3) purchase securities under section 8(d).
SEC. 10. ø78fff–4¿ DIRECT PAYMENT PROCEDURE.
(a) DETERMINATION REGARDING DIRECT PAYMENTS.—If SIPC
determines that—
(1) any member of SIPC (including a person who was a
member within one hundred eighty days prior to such determination)
has failed or is in danger of failing to meet its obligations
to customers;
(2) one or more of the conditions specified in section 5(b)(1)
exist with respect to such member;
(3) the claim of each customer of the member is within the
limits of protection provided in section 9(a);
(4) the claims of all customers of the member aggregate
less than $250,000;
(5) the cost to SIPC of satisfying customer claims under
this section will be less than the cost under a liquidation proceeding;
and
(6) such member’s registration as a broker-dealer under
section 15(b) of the 1934 Act has been terminated, or such
member has consented to the use of the direct payment procedure
set forth in this section,
SIPC may, in its discretion, use the direct payment procedure set
forth in this section in lieu of instituting a liquidation proceeding
with respect to such member.
(b) NOTICE.—Promptly after a determination under subsection
(a) that the direct payment procedure is to be used with respect to
a member, SIPC shall cause notice of such direct payment procedure
to be published in one or more newspapers of general circulation
in a form and manner determined by SIPC, and at the same
time shall cause to be mailed a copy of such notice to each person
who appears, from the books and records of such member, to have
been a customer of the member with an open account within the
past twelve months, to the address of such person as it appears
from the books and records of such member. Such notice shall state
that SIPC will satisfy customer claims directly, without a liquidation
proceeding, and shall set forth the form and manner in which
claims may be presented. A direct payment procedure shall be
deemed to commence on the date of first publication under this
subsection and no claim by a customer shall be paid or otherwise
satisfied by SIPC unless received within the six-month period
beginning on such date, except that SIPC shall, upon application
within such period, and for cause shown, grant a reasonable, fixed
extension of time for the filing of a claim by the United States, by
a State or political subdivision thereof, or by an infant or incompetent
person without a guardian.
(c) PAYMENTS TO CUSTOMERS.—SIPC shall promptly satisfy all
obligations of the member to each of its customers relating to, or
net equity claims based upon, securities or cash by the delivery of
securities or the effecting of payments to such customer (subject to
27 S.I.P.A. OF 1970 Sec. 10
the provisions of section 8(d) and section 9(a)) insofar as such obligations
are ascertainable from the books and records of the member
or are otherwise established to the satisfaction of SIPC. For
purposes of distributing securities to customers, all securities shall
be valued as of the close of business on the date of publication
under subsection (b). Any payment or delivery of securities pursuant
to this section may be conditioned upon the execution and delivery,
in a form to be determined by SIPC, of appropriate receipts,
supporting affidavits, releases, and assignments. To the extent
moneys of SIPC are used to satisfy the claims of customers, in
addition to all other rights it may have at law or in equity, SIPC
shall be subrogated to the claims of such customers against the
member.
(d) EFFECT ON CLAIMS.—Except as otherwise provided in this
section, nothing in this section shall limit the right of any person,
including any subrogee, to establish by formal proof or otherwise
such claims as such person may have against the member, including
claims for the payment of money and the delivery of specific
securities, without resort to moneys of SIPC.
(e) JURISDICTION OF BANKRUPTCY COURTS.—After SIPC has
published notice of the institution of a direct payment procedure
under this section, any person aggrieved by any determination of
SIPC with respect to his claim under subsection (c) may, within six
months following mailing by SIPC of its determination with respect
to such claim, seek a final adjudication of such claim. The courts
of the United States having jurisdiction over cases under title 11
of the United States Code shall have original and exclusive jurisdiction
of any civil action for the adjudication of such claim. Any
such action shall be brought in the judicial district where the head
office of the debtor is located. Any determination of the rights of
a customer under subsection (c) shall not prejudice any other right
or remedy of the customer against the member.
(f) DISCONTINUANCE OF DIRECT PAYMENT PROCEDURES.—If, at
any time after the institution of a direct payment procedure with
respect to a member, SIPC determines, in its discretion, that continuation
of such direct payment procedure is not appropriate,
SIPC may cease such direct payment procedure and, upon so doing,
may seek a protective decree pursuant to section 5. To the extent
payments of cash, distributions of securities, or determinations
with respect to the validity of a customer’s claim are made under
this section, such payments, distributions, and determinations shall
be recognized and given full effect in the event of any subsequent
liquidation proceeding. Any action brought under subsection (e)
and pending at the time of the appointment of a trustee under section
5(b)(3) shall be permanently stayed by the court at the time
of such appointment, and the court shall enter an order directing
the transfer or removal to it of such suit. Upon such removal or
transfer the complaint in such action shall constitute the plaintiff’s
claim in the liquidation proceeding, if appropriate, and shall be
deemed received by the trustee on the date of his appointment
regardless of the date of actual transfer or removal of such action.
(g) REFERENCES.—For purposes of this section, any reference to
the trustee in sections 7(b)(1), 8(d), 8(f), 9(a), 16(5) and 16(12) shall
be deemed a reference to SIPC, and any reference to the date of
Sec. 11 S.I.P.A. OF 1970 28
publication of notice under section 8(a) shall be deemed a reference
to the publication of notice under this section.
SEC. 11. ø78ggg¿ SEC FUNCTIONS.
(a) ADMINISTRATIVE PROCEDURE.—Determinations of the Commission,
for purposes of making rules pursuant to section 3(e)(3)
and section 13(f) shall be after appropriate notice and opportunity
for a hearing, and for submission of views of interested persons, in
accordance with the rulemaking procedures specified in section 553
of title 5, United States Code, but the holding of a hearing shall
not prevent adoption of any such rule or regulation upon expiration
of the notice period specified in subsection (d) of such section and
shall not be required to be on a record within the meaning of subchapter
II of chapter 5 of such title.
(b) ENFORCEMENT OF ACTIONS.—In the event of the refusal of
SIPC to commit its funds or otherwise to act for the protection of
customers of any member of SIPC, the Commission may apply to
the district court of the United States in which the principal office
of SIPC is located for an order requiring SIPC to discharge its obligations
under this Act and for such other relief as the court may
deem appropriate to carry out the purposes of this Act.
(c) EXAMINATIONS AND REPORTS.—
(1) EXAMINATION OF SIPC, ETC.—The Commission may
make such examinations and inspections of SIPC and require
SIPC to furnish it with such reports and records or copies
thereof as the Commission may consider necessary or appropriate
in the public interest or to effectuate the purposes of
this Act.
(2) REPORTS FROM SIPC.—As soon as practicable after the
close of each fiscal year, SIPC shall submit to the Commission
a written report relative to the conduct of its business, and the
exercise of the other rights and powers granted by this Act,
during such fiscal year. Such report shall include financial
statements setting forth the financial position of SIPC at the
end of such fiscal year and the results of its operations (including
the source and application of its funds) for such fiscal year.
The financial statements so included shall be examined by an
independent public accountant or firm of independent public
accountants, selected by SIPC and satisfactory to the Commission,
and shall be accompanied by the report thereon of such
accountant or firm. The Commission shall transmit such report
to the President and the Congress with such comment thereon
as the Commission may deem appropriate.
(d) FINANCIAL RESPONSIBILITY.—Section 15(c)(3) of the Securities
Exchange Act of 1934 is amended to read as follows:
‘‘(3) No broker or dealer shall make use of the mails or of any
means or instrumentality of interstate commerce to effect any
transaction in, or to induce or attempt to induce the purchase or
sale of, any security (other than an exempted security or commercial
paper, bankers’ acceptances, or commercial bills) in contravention
of such rules and regulations as the Commission shall prescribe
as necessary or appropriate in the public interest or for the
protection of investors to provide safeguards with respect to the
financial responsibility and related practices of brokers and dealers
29 S.I.P.A. OF 1970 Sec. 13
including, but not limited to, the acceptance of custody and use of
customers’ securities, and the carrying and use of customers’ deposits
or credit balances. Such rules and regulations shall require the
maintenance of reserves with respect to customers’ deposits or
credit balances, as determined by such rules and regulations.’’
SEC. 12. ø78hhh¿ EXAMINING AUTHORITY FUNCTIONS.
Each member of SIPC shall file with such member’s examining
authority, or collection agent if a collection agent has been designated
pursuant to section 13(a), such information (including reports
of, and information with respect to the gross revenues from
the securities business of such member, including the composition
thereof, transactions in securities effected by such member, and
other information with respect to such member’s activities, whether
in the securities business or otherwise, including customer accounts
maintained, net capital employed, and activities conducted)
as SIPC may determine to be necessary or appropriate for the purpose
of making assessments under section 4. The examining authority
or collection agent shall file with SIPC all or such part of
such information (and such compilations and analyses thereof) as
SIPC, by bylaw or rule, shall prescribe. No application, report, or
document filed pursuant to this section shall be deemed to be filed
pursuant to section 18 of the 1934 Act.
SEC. 13. ø78iii¿ FUNCTIONS OF SELF-REGULATORY ORGANIZATIONS.
(a) COLLECTION AGENT.—Each self-regulatory organization
shall act as collection agent for SIPC to collect the assessments
payable by all members of SIPC for whom such self-regulatory
organization is the examining authority, unless SIPC designates a
self-regulatory organization other than the examining authority to
act as collection agent for any member of SIPC who is a member
of or participant in more than one self-regulatory organization. If
the only self-regulatory organization of which a member of SIPC is
a member or in which it is a participant is a registered clearing
agency that is not the examining authority for the member, SIPC
may, nevertheless, designate such registered clearing agency as collection
agent for the member or may require that payments be
made directly to SIPC. The collection agent shall be obligated to
remit to SIPC assessments made under section 4 only to the extent
that payments of such assessment are received by such collection
agent. Members of SIPC who are not members of or participants
in a self-regulatory organization shall make payments directly to
SIPC.
(b) IMMUNITY.—No self-regulatory organization shall have any
liability to any person for any action taken or omitted in good faith
pursuant to section 5(a)(1) and section 5(a)(2).
(c) INSPECTIONS.—The self-regulatory organization of which a
member of SIPC is a member or in which it is a participant shall
inspect or examine such member for compliance with applicable
financial responsibility rules, except that—
(1) if the self-regulatory organization is a registered clearing
agency, the Commission may designate itself as responsible
for the examination of such member for compliance with applicable
financial responsibility rules; and
Sec. 14 S.I.P.A. OF 1970 30
(2) if a member of SIPC is a member of or participant in
more than one self-regulatory organization, the Commission,
pursuant to section 17(d) of the 1934 Act, shall designate one
of such self-regulatory organizations or itself as responsible for
the examination of such member for compliance with applicable
financial responsibility rules.
(d) REPORTS.—There shall be filed with SIPC by the self-regulatory
organizations such reports of inspections or examinations of
the members of SIPC (or copies thereof) as may be designated by
SIPC by bylaw or rule.
(e) CONSULTATION.—SIPC shall consult and cooperate with the
self-regulatory organizations toward the end:
(1) that there may be developed and carried into effect procedures
reasonably designed to detect approaching financial
difficulty upon the part of any member of SIPC;
(2) that, as nearly as may be practicable, examinations to
ascertain whether members of SIPC are in compliance with applicable
financial responsibility rules will be conducted by the
self-regulatory organizations under appropriate standards
(both as to method and scope) and reports of such examinations
will, where appropriate, be standard in form; and
(3) that, as frequently as may be practicable under the circumstances,
each member of SIPC will file financial information
with, and be examined by, the self-regulatory organization
which is the examining authority for such member.
(f) FINANCIAL CONDITION OF MEMBERS.—The Commission may,
by such rules as it determines necessary or appropriate in the public
interest and to carry out the purposes of this Act, require any
self-regulatory organization to furnish SIPC with reports and
records (or copies thereof) relating to the financial condition of
members of or participants in such self-regulatory organization.
SEC. 14. ø78jjj¿ PROHIBITED ACTS.
(a) FAILURE TO PAY ASSESSMENT, ETC.—If a member of SIPC
shall fail to file any report or information required pursuant to this
Act, or shall fail to pay when due all or any part of an assessment
made upon such member pursuant to this Act, and such failure
shall not have been cured, by the filing of such report or information
or by the making of such payment, together with interest and
penalty thereon, within five days after receipt by such member of
written notice of such failure given by or on behalf of SIPC, it shall
be unlawful for such member, unless specifically authorized by the
Commission, to engage in business as a broker or dealer. If such
member denies that it owes all or any part of the amount specified
in such notice, it may after payment of the full amount so specified
commence an action against SIPC in the appropriate United States
district court to recover the amount it denies owing.
(b) ENGAGING IN BUSINESS AFTER APPOINTMENT OF TRUSTEE
OR INITIATION OF DIRECT PAYMENT PROCEDURE.—It shall be unlawful
for any broker or dealer for whom a trustee has been appointed
pursuant to this Act or for whom a direct payment procedure has
been initiated to engage thereafter in business as a broker or
dealer, unless the Commission otherwise determines in the public
interest. The Commission may by order bar or suspend for any pe

31 S.I.P.A. OF 1970 Sec. 15
1 See also 18 U.S.C. 3623. [Printed in appendix to this volume.]
riod, any officer, director, general partner, owner of 10 per centum
or more of the voting securities, or controlling person of any broker
or dealer for whom a trustee has been appointed pursuant to this
Act or for whom a direct payment procedure has been initiated
from being or becoming associated with a broker or dealer, if after
appropriate notice and opportunity for hearing, the Commission
shall determine such bar or suspension to be in the public interest.
(c) CONCEALMENT OF ASSETS; FALSE STATEMENTS OR
CLAIMS.—1
(1) SPECIFIC PROHIBITED ACTS.—Any person who, directly
or indirectly, in connection with or in contemplation of any liquidation
proceeding or direct payment procedure—
(A) employs any device, scheme, or artifice to defraud;
(B) engages in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon
any person; or
(C) fraudulently or with intent to defeat this Act—
(i) conceals or transfers any property belonging to
the estate of a debtor;
(ii) makes a false statement or account;
(iii) presents or uses any false claim for proof
against the estate of a debtor;
(iv) receives any material amount of property from
a debtor;
(v) gives, offers, receives, transfers, or obtains any
money or property, remuneration, compensation, reward,
advantage, other consideration, or promise
thereof, for acting or forebearing to act;
(vi) conceals, destroys, mutilates, falsifies, makes
a false entry in, or otherwise falsifies any document
affecting or relating to the property or affairs of a
debtor; or
(vii) withholds, from any person entitled to its possession,
any document affecting or relating to the
property or affairs of a debtor.
shall be fined not more than $50,000 or imprisoned for not
more than five years, or both.
(2) FRAUDULENT CONVERSION.—Any person who, directly
or indirectly steals, embezzles, or fraudulently, or with intent
to defeat this Act, abstracts or converts to his own use or to
the use of another any of the moneys, securities, or other assets
of SIPC, or otherwise defrauds or attempts to defraud
SIPC or a trustee by any means, shall be fined not more than
$50,000 or imprisoned not more than five years, or both.
SEC. 15. ø78kkk¿ MISCELLANEOUS PROVISIONS.
(a) PUBLIC INSPECTION OF REPORTS.—Any notice, report, or
other document filed with SIPC pursuant to this Act shall be available
for public inspection unless SIPC or the Commission shall
determine that disclosure thereof is not in the public interest.
Nothing herein shall act to deny documents or information to the
Congress of the United States or the committees of either House
having jurisdiction over financial institutions, securities regulation,
Sec. 15 S.I.P.A. OF 1970 32
or related matters under the rules of each body. Nor shall the Commission
be denied any document or information which the Commission,
in its judgment, needs.
(b) LIABILITY OF MEMBERS OF SIPC.—Except for such assessments
as may be made upon such member pursuant to the provisions
of section 4, no member of SIPC shall have any liability
under this Act as a member of SIPC for, or in connection with, any
act or omission of any other broker or dealer whether in connection
with the conduct of the business or affairs of such broker or dealer
or otherwise and, without limiting the generality of the foregoing,
no member shall have any liability for or in respect of any indebtedness
or other liability of SIPC.
(c) LIABILITY OF SIPC AND DIRECTORS, OFFICERS, OR EMPLOYEES.—
Neither SIPC nor any of its Directors, officers, or employees
shall have any liability to any person for any action taken or omitted
in good faith under or in connection with any matter contemplated
by this Act.
(d) ADVERTISING.—SIPC shall by bylaw prescribe the manner
in which a member of SIPC may display any sign or signs (or include
in any advertisement a statement) relating to the protection
of customers and their accounts, or any other protections, afforded
under this Act. No member may display any such sign, or include
in an advertisement any such statement, except in accordance with
such bylaws. SIPC may also by bylaw prescribe such minimal
requirements as it considers necessary and appropriate to require
a member of SIPC to provide public notice of its membership in
SIPC.
(e) SIPC EXEMPT FROM TAXATION.—SIPC, its property, its
franchise, capital, reserves, surplus, and its income, shall be
exempt from all taxation now or hereafter imposed by the United
States or by any State or local taxing authority, except that any
real property and any tangible personal property (other than cash
and securities) of SIPC shall be subject to State and local taxation
to the same extent according to its value as other real and tangible
personal property is taxed. Assessments made upon a member of
SIPC shall constitute ordinary and necessary expenses in carrying
on the business of such member for the purpose of section 162(a)
of the Internal Revenue Code of 1954. The contribution and transfer
to SIPC of funds or securities held by any trust established by
a national securities exchange prior to January 1, 1970, for the
purpose of providing assistance to customers of members of such
exchange, shall not result in any taxable gain to such trust or give
rise to any taxable income to any member of SIPC under any provision
of the Internal Revenue Code of 1954, nor shall such contribution
or transfer, or any reduction in assessments made pursuant to
this Act, in any way affect the status, as ordinary and necessary
expenses under section 162(a) of the Internal Revenue Code of
1954, of any contributions made to such trust by such exchange at
any time prior to such transfer. Upon dissolution of SIPC, none of
its net assets shall inure to the benefit of any of its members.
(f) SECTION 20(a) OF 1934 ACT NOT TO APPLY.—The provisions
of subsection (a) of section 20 of the 1934 Act shall not apply to
any liability under or in connection with this Act.
33 S.I.P.A. OF 1970 Sec. 16
(g) SEC STUDY OF UNSAFE OR UNSOUND PRACTICES.—Not later
than twelve months after the date of enactment of this Act, the
Commission shall compile a list of unsafe or unsound practices by
members of SIPC in conducting their business and report to the
Congress (1) the steps being taken under the authority of existing
law to eliminate those practices and (2) recommendations concerning
additional legislation which may be needed to eliminate
those unsafe or unsound practices.
SEC. 16. ø78lll¿ DEFINITIONS.
For purposes of this Act, including the application of the Bankruptcy
Act to a liquidation proceeding:
(1) COMMISSION.—The term ‘‘Commission’’ means the Securities
and Exchange Commission.
(2) CUSTOMER.—The term ‘‘customer’’ of a debtor means
any person (including any person with whom the debtor deals
as principal or agent) who has a claim on account of securities
received, acquired, or held by the debtor in the ordinary course
of its business as a broker or dealer from or for the securities
accounts of such person for safekeeping, with a view to sale,
to cover consummated sales, pursuant to purchases, as collateral,
security, or for purposes of effecting transfer. The term
‘‘customer’’ includes any person who has a claim against the
debtor arising out of sales or conversions of such securities,
and any person who has deposited cash with the debtor for the
purpose of purchasing securities, but does not include—
(A) any person to the extent that the claim of such
person arises out of transactions with a foreign subsidiary
of a member of SIPC; or
(B) any person to the extent that such person has a
claim for cash or securities which by contract, agreement,
or understanding, or by operation of law, is part of the
capital of the debtor, or is subordinated to the claims of
any or all creditors of the debtor, notwithstanding that
some ground exists for declaring such contract, agreement,
or understanding void or voidable in a suit between the
claimant and the debtor.
(3) CUSTOMER NAME SECURITIES.—The term ‘‘customer
name securities’’ means securities which were held for the account
of a customer on the filing date by or on behalf of the
debtor and which on the filing date were registered in the
name of the customer, or were in the process of being so registered
pursuant to instructions from the debtor, but does not
include securities registered in the name of the customer
which, by endorsement or otherwise, were in negotiable form.
(4) CUSTOMER PROPERTY.—The term ‘‘customer property’’
means cash and securities (except customer name securities
delivered to the customer) at any time received, acquired, or
held by or for the account of a debtor from or for the securities
accounts of a customer, and the proceeds of any such property
transferred by the debtor, including property unlawfully converted.
The term ‘‘customer property’’ includes—
(A) securities held as property of the debtor to the extent
that the inability of the debtor to meet its obligations
Sec. 16 S.I.P.A. OF 1970 34
to customers for their net equity claims based on securities
of the same class and series of an issuer is attributable to
the debtor’s noncompliance with the requirements of section
15(c)(3) of the 1934 Act and the rules prescribed under
such section;
(B) resources provided through the use or realization
of customers’ debit cash balances and other customer-related
debit items as defined by the Commission by rule;
(C) any cash or securities apportioned to customer
property pursuant to section 6(d); and
(D) any other property of the debtor which, upon compliance
with applicable laws, rules, and regulations, would
have been set aside or held for the benefit of customers,
unless the trustee determines that including such property
within the meaning of such term would not significantly
increase customer property.
(5) DEBTOR.—The term ‘‘debtor’’ means a member of SIPC
with respect to whom an application for a protective decree has
been filed under section 5(a)(3) or a direct payment procedure
has been instituted under section 10(b).
(6) EXAMINING AUTHORITY.—The term ‘‘examining authority’’
means, with respect to any member of SIPC (A) the selfregulatory
organization which inspects or examines such member
of SIPC, or (B) the Commission if such member of SIPC is
not a member of or participant in any self-regulatory organization
or if the Commission has designated itself examining authority
for such member pursuant to section 13(c).
(7) FILING DATE.—The term ‘‘filing date’’ means the date
on which an application for a protective decree is filed under
section 5(a)(3), except that—
(A) if a petition under title 11 of the United States
Code concerning the debtor was filed before such date, the
term ‘‘filing date’’ means the date on which such petition
was filed;
(B) if the debtor is the subject of a proceeding pending
in any court or before any agency of the United States or
any State in which a receiver, trustee, or liquidator for
such debtor has been appointed and such proceeding was
commenced before the date on which such application was
filed, the term ‘‘filing date’’ means the date on which such
proceeding was commenced; or
(C) if the debtor is the subject of a direct payment procedure
or was the subject of a direct payment procedure
discontinued by SIPC pursuant to section 10(f), the term
‘‘filing date’’ means the date on which notice of such direct
payment procedure was published under section 10(b).
(8) FOREIGN SUBSIDIARY.—The term ‘‘foreign subsidiary’’
means any subsidiary of a member of SIPC which has its principal
place of business in a foreign country or which is organized
under the laws of a foreign country.
(9) GROSS REVENUES FROM THE SECURITIES BUSINESS.—The
term ‘‘gross revenues from the securities business’’ means the
sum of (but without duplication)—
35 S.I.P.A. OF 1970 Sec. 16
(A) commissions earned in connection with transactions
in securities effected for customers as agent (net of
commissions paid to other brokers and dealers in connection
with such transactions) and markups with respect to
purchases or sales of securities as principal;
(B) charges for executing or clearing transactions in
securities for other brokers and dealers;
(C) the net realized gain, if any, from principal transactions
in securities in trading accounts;
(D) the net profit, if any, from the management of or
participation in the underwriting or distribution of securities;
(E) interest earned on customers’ securities accounts;
(F) fees for investment advisory services (except when
rendered to one or more registered investment companies
or insurance company separate accounts) or account supervision
with respect to securities;
(G) fees for the solicitation of proxies with respect to,
or tenders or exchanges of, securities;
(H) income from service charges or other surcharges
with respect to securities;
(I) except as otherwise provided by rule of the Commission,
dividends and interest received on securities in
investment accounts of the broker or dealer;
(J) fees in connection with put, call, and other option
transactions in securities;
(K) commissions earned from transactions in (i) certificates
of deposit, and (ii) Treasury bills, bankers acceptances,
or commercial paper which have a maturity at the
time of issuance of not exceeding nine months, exclusive of
days of grace, or any renewal thereof, the maturity of
which is likewise limited, except that SIPC shall by bylaw
include in the aggregate of gross revenues only an appropriate
percentage of such commissions based on SIPC’s
loss experience with respect to such instruments over at
least the preceding five years; and
(L) fees and other income from such other categories
of the securities business as SIPC shall provide by bylaw.
Such term does not include revenues received by a broker or
dealer in connection with the distribution of shares of a registered
open end investment company or unit investment trust
or revenues derived by a broker or dealer from the sale of variable
annuities or from the conduct of the business of insurance.
(10) LIQUIDATION PROCEEDING.—The term ‘‘liquidation proceeding’’
means any proceeding for the liquidation of a debtor
under this Act in which a trustee has been appointed under
section 5(b)(3).
(11) NET EQUITY.—The term ‘‘net equity’’ means the dollar
amount of the account or accounts of a customer, to be determined
by—
(A) calculating the sum which would have been owed
by the debtor to such customer if the debtor had liquidated,
by sale or purchase on the filing date, all securiSec.
16 S.I.P.A. OF 1970 36
ties positions of such customer (other than customer name
securities reclaimed by such customer); minus
(B) any indebtedness of such customer to the debtor on
the filing date; plus
(C) any payment by such customer of such indebtedness
to the debtor which is made with the approval of the
trustee and within such period as the trustee may determine
(but in no event more than sixty days after the publication
of notice under section 8(a)).
In determining net equity under this paragraph, accounts held
by a customer in separate capacities shall be deemed to be accounts
of separate customers.
(12) PERSONS REGISTERED AS BROKERS OR DEALERS.—The
term ‘‘persons registered as brokers or dealers’’ includes any
person who is a member of a national securities exchange
other than a government securities broker or government securities
dealer registered under section 15C(a)(1)(A) of the 1934
Act.
(13) PROTECTIVE DECREE.—The term ‘‘protective decree’’
means a decree, issued by a court upon application of SIPC
under section 5(a)(3), that the customers of a member of SIPC
are in need of the protection provided under this Act.
(14) SECURITY.—The term ‘‘security’’ means any note,
stock, treasury stock, bond, debenture, evidence of indebtedness,
any collateral trust certificate, preorganization certificate
or subscription, transferable share, voting trust certificate, certificate
of deposit, certificate of deposit for a security, or any
security future as that term is defined in section 3(a)(55)(A) of
the Securities Exchange Act of 1934, any investment contract
or certificate of interest or participation in any profit-sharing
agreement or in any oil, gas, or mineral royalty or lease (if
such investment contract or interest is the subject of a registration
statement with the Commission pursuant to the provisions
of the Securities Act of 1933), any put, call, straddle,
option, or privilege on any security, or group or index of securities
(including any interest therein or based on the value
thereof), or any put, call, straddle, option, or privilege entered
into on a national securities exchange relating to foreign currency,
any certificate of interest or participation in, temporary
or interim certificate for, receipt for, guarantee of, or warrant
or right to subscribe to or purchase or sell any of the foregoing,
and any other instrument commonly known as a security. Except
as specifically provided above, the term ‘‘security’’ does not
include any currency, or any commodity or related contract or
futures contract, or any warrant or right to subscribe to or purchase
or sell any of the foregoing.

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7.<<GRAMM-LEACH-BLILEY ACT>>:

Notes to the Reader
1. This document is extracted from Committee Print 108-B of the
Committee on Financial Services of the U.S. House of Representatives,
and was prepared at the direction of that Committee.
2. Any material contained within brackets ø ¿ is not part of the
text of the law but is inserted as an aid to the reader.
3. Citations have been included to enable the reader to locate the
same material in the United States Code (U.S.C.). These citations
are not a part of the text of the law in which they appear. For
changes after the revision date of this excerpt (September 30, 2004)
to provisions of law in this publication that have citations to the
U.S. Code, see the United States Code Classification Tables published
by the Office of the Law Revision Counsel of the House of
Representatives at http://uscode.house.gov/uscct.htm.
REVISED THROUGH SEPTEMBER 30, 2004
2
GRAMM-LEACH-BLILEY ACT
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) ø12 U.S.C. 1811 note¿ SHORT TITLE.—This Act may be cited
as the ‘‘Gramm-Leach-Bliley Act’’.
* * * * * * *
TITLE II—FUNCTIONAL REGULATION
Subtitle A—Brokers and Dealers
* * * * * * *
SEC. 206. ø15 U.S.C. 78c note¿ DEFINITION OF IDENTIFIED BANKING
PRODUCT.
(a) DEFINITION OF IDENTIFIED BANKING PRODUCT.—For purposes
of paragraphs (4) and (5) of section 3(a) of the Securities Exchange
Act of 1934 (15 U.S.C. 78c(a) (4), (5)), the term ‘‘identified
banking product’’ means—
(1) a deposit account, savings account, certificate of deposit,
or other deposit instrument issued by a bank;
(2) a banker’s acceptance;
(3) a letter of credit issued or loan made by a bank;
(4) a debit account at a bank arising from a credit card or
similar arrangement;
(5) a participation in a loan which the bank or an affiliate
of the bank (other than a broker or dealer) funds, participates
in, or owns that is sold—
(A) to qualified investors; or
(B) to other persons that—
(i) have the opportunity to review and assess any
material information, including information regarding
the borrower’s creditworthiness; and
(ii) based on such factors as financial sophistication,
net worth, and knowledge and experience in financial
matters, have the capability to evaluate the
information available, as determined under generally
applicable banking standards or guidelines; or
(6) any swap agreement, including credit and equity
swaps, except that an equity swap that is sold directly to any
person other than a qualified investor (as defined in section
3(a)(54) of the Securities Act of 1934) shall not be treated as
an identified banking product.
3 GRAMM-LEACH-BLILEY ACT Sec. 206A
(b) DEFINITION OF SWAP AGREEMENT.—For purposes of subsection
(a)(6), the term ‘‘swap agreement’’ means any individually
negotiated contract, agreement, warrant, note, or option that is
based, in whole or in part, on the value of, any interest in, or any
quantitative measure or the occurrence of any event relating to,
one or more commodities, securities, currencies, interest or other
rates, indices, or other assets, but does not include any other identified
banking product, as defined in paragraphs (1) through (5) of
subsection (a).
(c) CLASSIFICATION LIMITED.—Classification of a particular
product as an identified banking product pursuant to this section
shall not be construed as finding or implying that such product is
or is not a security for any purpose under the securities laws, or
is or is not an account, agreement, contract, or transaction for any
purpose under the Commodity Exchange Act.
(d) INCORPORATED DEFINITIONS.—For purposes of this section,
the terms ‘‘bank’’ and ‘‘qualified investor’’ have the same meanings
as given in section 3(a) of the Securities Exchange Act of 1934, as
amended by this Act.
SEC. 206A. ø15 U.S.C. 78c note¿ SWAP AGREEMENT.
(a) IN GENERAL.—Except as provided in subsection (b), as used
in this section, the term ‘‘swap agreement’’ means any agreement,
contract, or transaction between eligible contract participants (as
defined in section 1a(12) of the Commodity Exchange Act as in effect
on the date of the enactment of this section), other than a person
that is an eligible contract participant under section 1a(12)(C)
of the Commodity Exchange Act, the material terms of which
(other than price and quantity) are subject to individual negotiation,
and that—
(1) is a put, call, cap, floor, collar, or similar option of any
kind for the purchase or sale of, or based on the value of, one
or more interest or other rates, currencies, commodities, indices,
quantitative measures, or other financial or economic interests
or property of any kind;
(2) provides for any purchase, sale, payment or delivery
(other than a dividend on an equity security) that is dependent
on the occurrence, non-occurrence, or the extent of the occurrence
of an event or contingency associated with a potential financial,
economic, or commercial consequence;
(3) provides on an executory basis for the exchange, on a
fixed or contingent basis, of one or more payments based on
the value or level of one or more interest or other rates, currencies,
commodities, securities, instruments of indebtedness,
indices, quantitative measures, or other financial or economic
interests or property of any kind, or any interest therein or
based on the value thereof, and that transfers, as between the
parties to the transaction, in whole or in part, the financial
risk associated with a future change in any such value or level
without also conveying a current or future direct or indirect
ownership interest in an asset (including any enterprise or investment
pool) or liability that incorporates the financial risk
so transferred, including any such agreement, contract, or
transaction commonly known as an interest rate swap, includSec.
206B GRAMM-LEACH-BLILEY ACT 4
ing a rate floor, rate cap, rate collar, cross-currency rate swap,
basis swap, currency swap, equity index swap, equity swap,
debt index swap, debt swap, credit spread, credit default swap,
credit swap, weather swap, or commodity swap;
(4) provides for the purchase or sale, on a fixed or contingent
basis, of any commodity, currency, instrument, interest,
right, service, good, article, or property of any kind; or
(5) is any combination or permutation of, or option on, any
agreement, contract, or transaction described in any of paragraphs
(1) through (4).
(b) EXCLUSIONS.—The term ‘‘swap agreement’’ does not
include—
(1) any put, call, straddle, option, or privilege on any security,
certificate of deposit, or group or index of securities, including
any interest therein or based on the value thereof;
(2) any put, call, straddle, option, or privilege entered into
on a national securities exchange registered pursuant to section
6(a) of the Securities Exchange Act of 1934 relating to foreign
currency;
(3) any agreement, contract, or transaction providing for
the purchase or sale of one or more securities on a fixed basis;
(4) any agreement, contract, or transaction providing for
the purchase or sale of one or more securities on a contingent
basis, unless such agreement, contract, or transaction predicates
such purchase or sale on the occurrence of a bona fide
contingency that might reasonably be expected to affect or be
affected by the creditworthiness of a party other than a party
to the agreement, contract, or transaction;
(5) any note, bond, or evidence of indebtedness that is a security
as defined in section 2(a)(1) of the Securities Act of 1933
or section 3(a)(10) of the Securities Exchange Act of 1934; or
(6) any agreement, contract, or transaction that is—
(A) based on a security; and
(B) entered into directly or through an underwriter (as
defined in section 2(a) of the Securities Act of 1933) by the
issuer of such security for the purposes of raising capital,
unless such agreement, contract, or transaction is entered
into to manage a risk associated with capital raising.
(c) RULE OF CONSTRUCTION REGARDING MASTER AGREEMENTS.—
As used in this section, the term ‘‘swap agreement’’ shall
be construed to include a master agreement that provides for an
agreement, contract, or transaction that is a swap agreement pursuant
to subsections (a) and (b), together with all supplements to
any such master agreement, without regard to whether the master
agreement contains an agreement, contract, or transaction that is
not a swap agreement pursuant to subsections (a) and (b), except
that the master agreement shall be considered to be a swap agreement
only with respect to each agreement, contract, or transaction
under the master agreement that is a swap agreement pursuant to
subsections (a) and (b).
SEC. 206B. ø15 U.S.C. 78c note¿ SECURITY-BASED SWAP AGREEMENT.
As used in this section, the term ‘‘security-based swap agreement’’
means a swap agreement (as defined in section 206A) of
5 GRAMM-LEACH-BLILEY ACT Sec. 501
which a material term is based on the price, yield, value, or volatility
of any security or any group or index of securities, or any interest
therein.
SEC. 206C. ø15 U.S.C. 78c note¿ NON-SECURITY-BASED SWAP AGREEMENT.
As used in this section, the term ‘‘non-security-based swap
agreement’’ means any swap agreement (as defined in section
206A) that is not a security-based swap agreement (as defined in
section 206B).
* * * * * * *
Subtitle D—Banks and Bank Holding
Companies
SEC. 241. ø15 U.S.C. 78m note¿ CONSULTATION.
(a) IN GENERAL.—The Securities and Exchange Commission
shall consult and coordinate comments with the appropriate Federal
banking agency before taking any action or rendering any
opinion with respect to the manner in which any insured depository
institution or depository institution holding company reports
loan loss reserves in its financial statement, including the amount
of any such loan loss reserve.
(b) DEFINITIONS.—For purposes of subsection (a), the terms ‘‘insured
depository institution’’, ‘‘depository institution holding company’’,
and ‘‘appropriate Federal banking agency’’ have the same
meaning as given in section 3 of the Federal Deposit Insurance Act.
* * * * * * *
TITLE V—PRIVACY
Subtitle A—Disclosure of Nonpublic
Personal Information
SEC. 501. ø15 U.S.C. 6801¿ PROTECTION OF NONPUBLIC PERSONAL INFORMATION.
(a) PRIVACY OBLIGATION POLICY.—It is the policy of the Congress
that each financial institution has an affirmative and continuing
obligation to respect the privacy of its customers and to
protect the security and confidentiality of those customers’ nonpublic
personal information.
(b) FINANCIAL INSTITUTIONS SAFEGUARDS.—In furtherance of
the policy in subsection (a), each agency or authority described in
section 505(a) shall establish appropriate standards for the financial
institutions subject to their jurisdiction relating to administrative,
technical, and physical safeguards—
(1) to insure the security and confidentiality of customer
records and information;
(2) to protect against any anticipated threats or hazards to
the security or integrity of such records; and
Sec. 502 GRAMM-LEACH-BLILEY ACT 6
(3) to protect against unauthorized access to or use of such
records or information which could result in substantial harm
or inconvenience to any customer.
SEC. 502. ø15 U.S.C. 6802¿ OBLIGATIONS WITH RESPECT TO DISCLOSURES
OF PERSONAL INFORMATION.
(a) NOTICE REQUIREMENTS.—Except as otherwise provided in
this subtitle, a financial institution may not, directly or through
any affiliate, disclose to a nonaffiliated third party any nonpublic
personal information, unless such financial institution provides or
has provided to the consumer a notice that complies with section
503.
(b) OPT OUT.—
(1) IN GENERAL.—A financial institution may not disclose
nonpublic personal information to a nonaffiliated third party
unless—
(A) such financial institution clearly and conspicuously
discloses to the consumer, in writing or in electronic form
or other form permitted by the regulations prescribed
under section 504, that such information may be disclosed
to such third party;
(B) the consumer is given the opportunity, before the
time that such information is initially disclosed, to direct
that such information not be disclosed to such third party;
and
(C) the consumer is given an explanation of how the
consumer can exercise that nondisclosure option.
(2) EXCEPTION.—This subsection shall not prevent a financial
institution from providing nonpublic personal information
to a nonaffiliated third party to perform services for or functions
on behalf of the financial institution, including marketing
of the financial institution’s own products or services, or financial
products or services offered pursuant to joint agreements
between two or more financial institutions that comply with
the requirements imposed by the regulations prescribed under
section 504, if the financial institution fully discloses the providing
of such information and enters into a contractual agreement
with the third party that requires the third party to
maintain the confidentiality of such information.
(c) LIMITS ON REUSE OF INFORMATION.—Except as otherwise
provided in this subtitle, a nonaffiliated third party that receives
from a financial institution nonpublic personal information under
this section shall not, directly or through an affiliate of such receiving
third party, disclose such information to any other person that
is a nonaffiliated third party of both the financial institution and
such receiving third party, unless such disclosure would be lawful
if made directly to such other person by the financial institution.
(d) LIMITATIONS ON THE SHARING OF ACCOUNT NUMBER INFORMATION
FOR MARKETING PURPOSES.—A financial institution shall
not disclose, other than to a consumer reporting agency, an account
number or similar form of access number or access code for a credit
card account, deposit account, or transaction account of a consumer
to any nonaffiliated third party for use in telemarketing, direct
mail marketing, or other marketing through electronic mail to the
consumer.
7 GRAMM-LEACH-BLILEY ACT Sec. 502
(e) GENERAL EXCEPTIONS.—Subsections (a) and (b) shall not
prohibit the disclosure of nonpublic personal information—
(1) as necessary to effect, administer, or enforce a transaction
requested or authorized by the consumer, or in connection
with—
(A) servicing or processing a financial product or service
requested or authorized by the consumer;
(B) maintaining or servicing the consumer’s account
with the financial institution, or with another entity as
part of a private label credit card program or other extension
of credit on behalf of such entity; or
(C) a proposed or actual securitization, secondary market
sale (including sales of servicing rights), or similar
transaction related to a transaction of the consumer;
(2) with the consent or at the direction of the consumer;
(3)(A) to protect the confidentiality or security of the financial
institution’s records pertaining to the consumer, the service
or product, or the transaction therein; (B) to protect against
or prevent actual or potential fraud, unauthorized transactions,
claims, or other liability; (C) for required institutional risk control,
or for resolving customer disputes or inquiries; (D) to persons
holding a legal or beneficial interest relating to the consumer;
or (E) to persons acting in a fiduciary or representative
capacity on behalf of the consumer;
(4) to provide information to insurance rate advisory organizations,
guaranty funds or agencies, applicable rating agencies
of the financial institution, persons assessing the institution’s
compliance with industry standards, and the institution’s
attorneys, accountants, and auditors;
(5) to the extent specifically permitted or required under
other provisions of law and in accordance with the Right to Financial
Privacy Act of 1978, to law enforcement agencies (including
a Federal functional regulator, the Secretary of the
Treasury with respect to subchapter II of chapter 53 of title 31,
United States Code, and chapter 2 of title I of Public Law 91–
508 (12 U.S.C. 1951–1959), a State insurance authority, or the
Federal Trade Commission), self-regulatory organizations, or
for an investigation on a matter related to public safety;
(6)(A) to a consumer reporting agency in accordance with
the Fair Credit Reporting Act, or (B) from a consumer report
reported by a consumer reporting agency;
(7) in connection with a proposed or actual sale, merger,
transfer, or exchange of all or a portion of a business or operating
unit if the disclosure of nonpublic personal information
concerns solely consumers of such business or unit; or
(8) to comply with Federal, State, or local laws, rules, and
other applicable legal requirements; to comply with a properly
authorized civil, criminal, or regulatory investigation or subpoena
or summons by Federal, State, or local authorities; or to
respond to judicial process or government regulatory authorities
having jurisdiction over the financial institution for examination,
compliance, or other purposes as authorized by law.
Sec. 503 GRAMM-LEACH-BLILEY ACT 8
SEC. 503. ø15 U.S.C. 6803¿ DISCLOSURE OF INSTITUTION PRIVACY POLICY.
(a) DISCLOSURE REQUIRED.—At the time of establishing a customer
relationship with a consumer and not less than annually
during the continuation of such relationship, a financial institution
shall provide a clear and conspicuous disclosure to such consumer,
in writing or in electronic form or other form permitted by the regulations
prescribed under section 504, of such financial institution’s
policies and practices with respect to—
(1) disclosing nonpublic personal information to affiliates
and nonaffiliated third parties, consistent with section 502, including
the categories of information that may be disclosed;
(2) disclosing nonpublic personal information of persons
who have ceased to be customers of the financial institution;
and
(3) protecting the nonpublic personal information of consumers.
Such disclosures shall be made in accordance with the regulations
prescribed under section 504.
(b) INFORMATION TO BE INCLUDED.—The disclosure required by
subsection (a) shall include—
(1) the policies and practices of the institution with respect
to disclosing nonpublic personal information to nonaffiliated
third parties, other than agents of the institution, consistent
with section 502 of this subtitle, and including—
(A) the categories of persons to whom the information
is or may be disclosed, other than the persons to whom the
information may be provided pursuant to section 502(e);
and
(B) the policies and practices of the institution with respect
to disclosing of nonpublic personal information of
persons who have ceased to be customers of the financial
institution;
(2) the categories of nonpublic personal information that
are collected by the financial institution;
(3) the policies that the institution maintains to protect
the confidentiality and security of nonpublic personal information
in accordance with section 501; and
(4) the disclosures required, if any, under section
603(d)(2)(A)(iii) of the Fair Credit Reporting Act.
SEC. 504. ø15 U.S.C. 6804¿ RULEMAKING.
(a) REGULATORY AUTHORITY.—
(1) RULEMAKING.—The Federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury,
the Securities and Exchange Commission, and the Federal
Trade Commission shall each prescribe, after consultation as
appropriate with representatives of State insurance authorities
designated by the National Association of Insurance Commissioners,
such regulations as may be necessary to carry out the
purposes of this subtitle with respect to the financial institutions
subject to their jurisdiction under section 505.
(2) COORDINATION, CONSISTENCY, AND COMPARABILITY.—
Each of the agencies and authorities required under paragraph
(1) to prescribe regulations shall consult and coordinate with
9 GRAMM-LEACH-BLILEY ACT Sec. 505
the other such agencies and authorities for the purposes of assuring,
to the extent possible, that the regulations prescribed
by each such agency and authority are consistent and comparable
with the regulations prescribed by the other such
agencies and authorities.
(3) PROCEDURES AND DEADLINE.—Such regulations shall be
prescribed in accordance with applicable requirements of title
5, United States Code, and shall be issued in final form not
later than 6 months after the date of the enactment of this Act.
(b) AUTHORITY TO GRANT EXCEPTIONS.—The regulations prescribed
under subsection (a) may include such additional exceptions
to subsections (a) through (d) of section 502 as are deemed consistent
with the purposes of this subtitle.
SEC. 505. ø15 U.S.C. 6805¿ ENFORCEMENT.
(a) IN GENERAL.—This subtitle and the regulations prescribed
thereunder shall be enforced by the Federal functional regulators,
the State insurance authorities, and the Federal Trade Commission
with respect to financial institutions and other persons subject to
their jurisdiction under applicable law, as follows:
(1) Under section 8 of the Federal Deposit Insurance Act,
in the case of—
(A) national banks, Federal branches and Federal
agencies of foreign banks, and any subsidiaries of such entities
(except brokers, dealers, persons providing insurance,
investment companies, and investment advisers), by
the Office of the Comptroller of the Currency;
(B) member banks of the Federal Reserve System
(other than national banks), branches and agencies of foreign
banks (other than Federal branches, Federal agencies,
and insured State branches of foreign banks), commercial
lending companies owned or controlled by foreign banks,
organizations operating under section 25 or 25A of the
Federal Reserve Act, and bank holding companies and
their nonbank subsidiaries or affiliates (except brokers,
dealers, persons providing insurance, investment companies,
and investment advisers), by the Board of Governors
of the Federal Reserve System;
(C) banks insured by the Federal Deposit Insurance
Corporation (other than members of the Federal Reserve
System), insured State branches of foreign banks, and any
subsidiaries of such entities (except brokers, dealers, persons
providing insurance, investment companies, and investment
advisers), by the Board of Directors of the Federal
Deposit Insurance Corporation; and
(D) savings associations the deposits of which are insured
by the Federal Deposit Insurance Corporation, and
any subsidiaries of such savings associations (except brokers,
dealers, persons providing insurance, investment
companies, and investment advisers), by the Director of
the Office of Thrift Supervision.
(2) Under the Federal Credit Union Act, by the Board of
the National Credit Union Administration with respect to any
Sec. 507 GRAMM-LEACH-BLILEY ACT 10
federally insured credit union, and any subsidiaries of such an
entity.
(3) Under the Securities Exchange Act of 1934, by the Securities
and Exchange Commission with respect to any broker
or dealer.
(4) Under the Investment Company Act of 1940, by the Securities
and Exchange Commission with respect to investment
companies.
(5) Under the Investment Advisers Act of 1940, by the Securities
and Exchange Commission with respect to investment
advisers registered with the Commission under such Act.
(6) Under State insurance law, in the case of any person
engaged in providing insurance, by the applicable State insurance
authority of the State in which the person is domiciled,
subject to section 104 of this Act.
(7) Under the Federal Trade Commission Act, by the Federal
Trade Commission for any other financial institution or
other person that is not subject to the jurisdiction of any agency
or authority under paragraphs (1) through (6) of this subsection.
(b) ENFORCEMENT OF SECTION 501.—
(1) IN GENERAL.—Except as provided in paragraph (2), the
agencies and authorities described in subsection (a) shall implement
the standards prescribed under section 501(b) in the
same manner, to the extent practicable, as standards prescribed
pursuant to section 39(a) of the Federal Deposit Insurance
Act are implemented pursuant to such section.
(2) EXCEPTION.—The agencies and authorities described in
paragraphs (3), (4), (5), (6), and (7) of subsection (a) shall implement
the standards prescribed under section 501(b) by rule
with respect to the financial institutions and other persons
subject to their respective jurisdictions under subsection (a).
(c) ABSENCE OF STATE ACTION.—If a State insurance authority
fails to adopt regulations to carry out this subtitle, such State shall
not be eligible to override, pursuant to section 47(g)(2)(B)(iii) of the
Federal Deposit Insurance Act, the insurance customer protection
regulations prescribed by a Federal banking agency under section
47(a) of such Act.
(d) DEFINITIONS.—The terms used in subsection (a)(1) that are
not defined in this subtitle or otherwise defined in section 3(s) of
the Federal Deposit Insurance Act shall have the same meaning as
given in section 1(b) of the International Banking Act of 1978.
* * * * * * *
SEC. 507. ø15 U.S.C. 6807¿ RELATION TO STATE LAWS.
(a) IN GENERAL.—This subtitle and the amendments made by
this subtitle shall not be construed as superseding, altering, or affecting
any statute, regulation, order, or interpretation in effect in
any State, except to the extent that such statute, regulation, order,
or interpretation is inconsistent with the provisions of this subtitle,
and then only to the extent of the inconsistency.
(b) GREATER PROTECTION UNDER STATE LAW.—For purposes of
this section, a State statute, regulation, order, or interpretation is
not inconsistent with the provisions of this subtitle if the protection

8.<<COMMODITY FUTURES MODERNIZATION ACT OF 2000>>


Notes to the Reader
1. This document is extracted from Committee Print 108-B of the
Committee on Financial Services of the U.S. House of Representatives,
and was prepared at the direction of that Committee.
2. Any material contained within brackets ø ¿ is not part of the
text of the law but is inserted as an aid to the reader.
3. Citations have been included to enable the reader to locate the
same material in the United States Code (U.S.C.). These citations
are not a part of the text of the law in which they appear. For
changes after the revision date of this excerpt (September 30, 2004)
to provisions of law in this publication that have citations to the
U.S. Code, see the United States Code Classification Tables published
by the Office of the Law Revision Counsel of the House of
Representatives at http://uscode.house.gov/uscct.htm.
REVISED THROUGH SEPTEMBER 30, 2004
2
COMMODITY FUTURES MODERNIZATION ACT OF 2000
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. ø7 U.S.C. 1 note¿ SHORT TITLE; TABLE OF CONTENTS.
(a) SHORT TITLE.—This Act may be cited as the ‘‘Commodity
Futures Modernization Act of 2000’’.
* * * * * * *
TITLE I—COMMODITY FUTURES
MODERNIZATION
* * * * * * *
SEC. 105. HYBRID INSTRUMENTS; SWAP TRANSACTIONS.
(a) * * *
* * * * * * *
(c) ø7 U.S.C. 2 note¿ STUDY REGARDING RETAIL SWAPS.—
(1) IN GENERAL.—The Board of Governors of the Federal
Reserve System, the Secretary of the Treasury, the Commodity
Futures Trading Commission, and the Securities and Exchange
Commission shall conduct a study of issues involving the offering
of swap agreements to persons other than eligible contract
participants (as defined in section 1a of the Commodity Exchange
Act).
(2) MATTERS TO BE ADDRESSED.—The study shall address—
(A) the potential uses of swap agreements by persons
other than eligible contract participants;
(B) the extent to which financial institutions are willing
to offer swap agreements to persons other than eligible
contract participants;
(C) the appropriate regulatory structure to address
customer protection issues that may arise in connection
with the offer of swap agreements to persons other than
eligible contract participants; and
(D) such other relevant matters deemed necessary or
appropriate to address.
(3) REPORT.—Before the end of the 1-year period beginning
on the date of the enactment of this Act, a report on the findings
and conclusions of the study required by paragraph (1)
shall be submitted to Congress, together with such recommendations
for legislative action as are deemed necessary
and appropriate.
* * * * * * *
3 COMMODITY FUTURES MODERNIZATION ACT OF 2000 Sec. 402
SEC. 122. ø7 U.S.C. 1 note¿ RULE OF CONSTRUCTION.
Except as expressly provided in this Act or an amendment
made by this Act, nothing in this Act or an amendment made by
this Act supersedes, affects, or otherwise limits or expands the
scope and applicability of laws governing the Securities and Exchange
Commission.
* * * * * * *
TITLE III—LEGAL CERTAINTY FOR
SWAP AGREEMENTS
* * * * * * *
SEC. 304. ø7 U.S.C. 1 note¿ SAVINGS PROVISIONS.
Nothing in this Act or the amendments made by this Act shall
be construed as finding or implying that any swap agreement is or
is not a security for any purpose under the securities laws. Nothing
in this Act or the amendments made by this Act shall be construed
as finding or implying that any swap agreement is or is not a futures
contract or commodity option for any purpose under the Commodity
Exchange Act.
* * * * * * *
TITLE IV—REGULATORY
RESPONSIBILITY FOR BANK PRODUCTS
SEC. 401. ø7 U.S.C. 1 note¿ SHORT TITLE.
This title may be cited as the ‘‘Legal Certainty for Bank Products
Act of 2000’’.
SEC. 402. ø7 U.S.C. 27¿ DEFINITIONS.
(a) BANK.—In this title, the term ‘‘bank’’ means—
(1) any depository institution (as defined in section 3(c) of
the Federal Deposit Insurance Act);
(2) any foreign bank or branch or agency of a foreign bank
(each as defined in section 1(b) of the International Banking
Act of 1978);
(3) any Federal or State credit union (as defined in section
101 of the Federal Credit Union Act);
(4) any corporation organized under section 25A of the
Federal Reserve Act;
(5) any corporation operating under section 25 of the Federal
Reserve Act;
(6) any trust company; or
(7) any subsidiary of any entity described in paragraph (1)
through (6) of this subsection, if the subsidiary is regulated as
if the subsidiary were part of the entity and is not a broker or
dealer (as such terms are defined in section 3 of the Securities
Exchange Act of 1934) or a futures commission merchant (as
defined in section 1a(20) of the Commodity Exchange Act).
(b) IDENTIFIED BANKING PRODUCT.—In this title, the term
‘‘identified banking product’’ shall have the same meaning as in
Sec. 403 COMMODITY FUTURES MODERNIZATION ACT OF 2000 4
paragraphs (1) through (5) of section 206(a) of the Gramm-Leach-
Bliley Act, except that in applying such section for purposes of this
title—
(1) the term ‘‘bank’’ shall have the meaning given in subsection
(a) of this section; and
(2) the term ‘‘qualified investor’’ means eligible contract
participant (as defined in section 1a(12) of the Commodity Exchange
Act, as in effect on the date of the enactment of the
Commodity Futures Modernization Act of 2000).
(c) HYBRID INSTRUMENT.—In this title, the term ‘‘hybrid instrument’’
means an identified banking product not excluded by section
403 of this Act, offered by a bank, having one or more payments
indexed to the value, level, or rate of, or providing for the delivery
of, one or more commodities (as defined in section 1a(4) of the Commodity
Exchange Act).
(d) COVERED SWAP AGREEMENT.—In this title, the term ‘‘covered
swap agreement’’ means a swap agreement (as defined in section
206(b) of the Gramm-Leach-Bliley Act), including a credit or
equity swap, based on a commodity other than an agricultural commodity
enumerated in section 1a(4) of the Commodity Exchange
Act if—
(1) the swap agreement—
(A) is entered into only between persons that are eligible
contract participants (as defined in section 1a(12) of
the Commodity Exchange Act, as in effect on the date of
the enactment of the Commodity Futures Modernization
Act of 2000) at the time the persons enter into the swap
agreement; and
(B) is not entered into or executed on a trading facility
(as defined in section 1a(33) of the Commodity Exchange
Act); or
(2) the swap agreement—
(A) is entered into or executed on an electronic trading
facility (as defined in section 1a(10) of the Commodity Exchange
Act);
(B) is entered into on a principal-to-principal basis between
parties trading for their own accounts or as described
in section 1a(12)(B)(ii) of the Commodity Exchange
Act;
(C) is entered into only between persons that are eligible
contract participants as described in subparagraph (A),
(B)(ii), or (C) of section 1a(12) of the Commodity Exchange
Act, as in effect on the date of the enactment of the Commodity
Futures Modernization Act of 2000, at the time the
persons enter into the swap agreement; and
(D) is an agreement, contract or transaction in an excluded
commodity (as defined in section 1a(13) of the Commodity
Exchange Act).
SEC. 403. ø7 U.S.C. 27a¿ EXCLUSION OF IDENTIFIED BANKING PRODUCTS
COMMONLY OFFERED ON OR BEFORE DECEMBER 5,
2000.
No provision of the Commodity Exchange Act shall apply to,
and the Commodity Futures Trading Commission shall not exercise
5 COMMODITY FUTURES MODERNIZATION ACT OF 2000 Sec. 405
regulatory authority with respect to, an identified banking product
if—
(1) an appropriate banking agency certifies that the product
has been commonly offered, entered into, or provided in the
United States by any bank on or before December 5, 2000,
under applicable banking law; and
(2) the product was not prohibited by the Commodity Exchange
Act and not regulated by the Commodity Futures Trading
Commission as a contract of sale of a commodity for future
delivery (or an option on such a contract) or an option on a
commodity, on or before December 5, 2000.
SEC. 404. ø7 U.S.C. 27b¿ EXCLUSION OF CERTAIN IDENTIFIED BANKING
PRODUCTS OFFERED BY BANKS AFTER DECEMBER 5, 2000.
No provision of the Commodity Exchange Act shall apply to,
and the Commodity Futures Trading Commission shall not exercise
regulatory authority with respect to, an identified banking product
which had not been commonly offered, entered into, or provided in
the United States by any bank on or before December 5, 2000,
under applicable banking law if—
(1) the product has no payment indexed to the value, level,
or rate of, and does not provide for the delivery of, any commodity
(as defined in section 1a(4) of the Commodity Exchange
Act); or
(2) the product or commodity is otherwise excluded from
the Commodity Exchange Act.
SEC. 405. ø7 U.S.C. 27c¿ EXCLUSION OF CERTAIN OTHER IDENTIFIED
BANKING PRODUCTS.
(a) IN GENERAL.—No provision of the Commodity Exchange Act
shall apply to, and the Commodity Futures Trading Commission
shall not exercise regulatory authority with respect to, a banking
product if the product is a hybrid instrument that is predominantly
a banking product under the predominance test set forth in subsection
(b).
(b) PREDOMINANCE TEST.—A hybrid instrument shall be considered
to be predominantly a banking product for purposes of this
section if—
(1) the issuer of the hybrid instrument receives payment
in full of the purchase price of the hybrid instrument substantially
contemporaneously with delivery of the hybrid instrument;
(2) the purchaser or holder of the hybrid instrument is not
required to make under the terms of the instrument, or any
arrangement referred to in the instrument, any payment to the
issuer in addition to the purchase price referred to in paragraph
(1), whether as margin, settlement payment, or otherwise
during the life of the hybrid instrument or at maturity;
(3) the issuer of the hybrid instrument is not subject by
the terms of the instrument to mark-to-market margining
requirements; and
(4) the hybrid instrument is not marketed as a contract of
sale of a commodity for future delivery (or option on such a
contract) subject to the Commodity Exchange Act.
Sec. 406 COMMODITY FUTURES MODERNIZATION ACT OF 2000 6
(c) MARK-TO-MARKET MARGINING REQUIREMENT.—For purposes
of subsection (b)(3), mark-to-market margining requirements shall
not include the obligation of an issuer of a secured debt instrument
to increase the amount of collateral held in pledge for the benefit
of the purchaser of the secured debt instrument to secure the
repayment obligations of the issuer under the secured debt instrument.
SEC. 406. ø7 U.S.C. 27d¿ ADMINISTRATION OF THE PREDOMINANCE
TEST.
(a) IN GENERAL.—No provision of the Commodity Exchange Act
shall apply to, and the Commodity Futures Trading Commission
shall not regulate, a hybrid instrument, unless the Commission
determines, by or under a rule issued in accordance with this section,
that—
(1) the action is necessary and appropriate in the public interest;
(2) the action is consistent with the Commodity Exchange
Act and the purposes of the Commodity Exchange Act; and
(3) the hybrid instrument is not predominantly a banking
product under the predominance test set forth in section 405(b)
of this Act.
(b) CONSULTATION.—Before commencing a rulemaking or making
a determination pursuant to a rule issued under this title, the
Commodity Futures Trading Commission shall consult with and
seek the concurrence of the Board of Governors of the Federal Reserve
System concerning—
(1) the nature of the hybrid instrument; and
(2) the history, purpose, extent, and appropriateness of the
regulation of the hybrid instrument under the Commodity Exchange
Act and under appropriate banking laws.
(c) OBJECTION TO COMMISSION REGULATION.—
(1) FILING OF PETITION FOR REVIEW.—The Board of Governors
of the Federal Reserve System may obtain review of any
rule or determination referred to in subsection (a) in the
United States Court of Appeals for the District of Columbia
Circuit by filing in the court, not later than 60 days after the
date of publication of the rule or determination, a written petition
requesting that the rule or determination be set aside.
Any proceeding to challenge any such rule or determination
shall be expedited by the court.
(2) TRANSMITTAL OF PETITION AND RECORD.—A copy of a
petition described in paragraph (1) shall be transmitted as
soon as possible by the Clerk of the court to an officer or employee
of the Commodity Futures Trading Commission designated
for that purpose. Upon receipt of the petition, the Commission
shall file with the court the rule or determination
under review and any documents referred to therein, and any
other relevant materials prescribed by the court.
(3) EXCLUSIVE JURISDICTION.—On the date of the filing of
a petition under paragraph (1), the court shall have jurisdiction,
which shall become exclusive on the filing of the materials
set forth in paragraph (2), to affirm and enforce or to set
aside the rule or determination at issue.
7 COMMODITY FUTURES MODERNIZATION ACT OF 2000 Sec. 408
(4) STANDARD OF REVIEW.—The court shall determine to affirm
and enforce or set aside a rule or determination of the
Commodity Futures Trading Commission under this section,
based on the determination of the court as to whether—
(A) the subject product is predominantly a banking
product; and
(B) making the provision or provisions of the Commodity
Exchange Act at issue applicable to the subject instrument
is appropriate in light of the history, purpose,
and extent of regulation under such Act, this title, and
under the appropriate banking laws, giving deference neither
to the views of the Commodity Futures Trading Commission
nor the Board of Governors of the Federal Reserve
System.
(5) JUDICIAL STAY.—The filing of a petition by the Board
pursuant to paragraph (1) shall operate as a judicial stay, until
the date on which the determination of the court is final (including
any appeal of the determination).
(6) OTHER AUTHORITY TO CHALLENGE.—Any aggrieved
party may seek judicial review pursuant to section 6(c) of the
Commodity Exchange Act of a determination or rulemaking by
the Commodity Futures Trading Commission under this section.
SEC. 407. ø7 U.S.C. 27e¿ EXCLUSION OF COVERED SWAP AGREEMENTS.
No provision of the Commodity Exchange Act (other than section
5b of such Act with respect to the clearing of covered swap
agreements) shall apply to, and the Commodity Futures Trading
Commission shall not exercise regulatory authority with respect to,
a covered swap agreement offered, entered into, or provided by a
bank.
SEC. 408. ø7 U.S.C. 27f¿ CONTRACT ENFORCEMENT.
(a) HYBRID INSTRUMENTS.—No hybrid instrument shall be void,
voidable, or unenforceable, and no party to a hybrid instrument
shall be entitled to rescind, or recover any payment made with respect
to, a hybrid instrument under any provision of Federal or
State law, based solely on the failure of the hybrid instrument to
satisfy the predominance test set forth in section 405(b) of this Act
or to comply with the terms or conditions of an exemption or exclusion
from any provision of the Commodity Exchange Act or any
regulation of the Commodity Futures Trading Commission.
(b) COVERED SWAP AGREEMENTS.—No covered swap agreement
shall be void, voidable, or unenforceable, and no party to a covered
swap agreement shall be entitled to rescind, or recover any payment
made with respect to, a covered swap agreement under any
provision of Federal or State law, based solely on the failure of the
covered swap agreement to comply with the terms or conditions of
an exemption or exclusion from any provision of the Commodity
Exchange Act or any regulation of the Commodity Futures Trading
Commission.
(c) PREEMPTION.—This title shall supersede and preempt the
application of any State or local law that prohibits or regulates
gaming or the operation of bucket shops (other than antifraud provisions
of general applicability) in the case of—
Sec. 408 COMMODITY FUTURES MODERNIZATION ACT OF 2000 8
(1) a hybrid instrument that is predominantly a banking
product; or
(2) a covered swap agreement.

9.<<PUBLIC LAW 107–204—JULY 30, 2002>>


PUBLIC LAW 107–204—JULY 30, 2002 116 STAT. 745
Public Law 107–204
107th Congress
An Act
To protect investors by improving the accuracy and reliability of corporate disclosures
made pursuant to the securities laws, and for other purposes.
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) SHORT TITLE.—This Act may be cited as the ‘‘Sarbanes-
Oxley Act of 2002’’.
(b) TABLE OF CONTENTS.—The table of contents for this Act
is as follows:
Sec. 1. Short title; table of contents.
Sec. 2. Definitions.
Sec. 3. Commission rules and enforcement.
TITLE I—PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
Sec. 101. Establishment; administrative provisions.
Sec. 102. Registration with the Board.
Sec. 103. Auditing, quality control, and independence standards and rules.
Sec. 104. Inspections of registered public accounting firms.
Sec. 105. Investigations and disciplinary proceedings.
Sec. 106. Foreign public accounting firms.
Sec. 107. Commission oversight of the Board.
Sec. 108. Accounting standards.
Sec. 109. Funding.
TITLE II—AUDITOR INDEPENDENCE
Sec. 201. Services outside the scope of practice of auditors.
Sec. 202. Preapproval requirements.
Sec. 203. Audit partner rotation.
Sec. 204. Auditor reports to audit committees.
Sec. 205. Conforming amendments.
Sec. 206. Conflicts of interest.
Sec. 207. Study of mandatory rotation of registered public accounting firms.
Sec. 208. Commission authority.
Sec. 209. Considerations by appropriate State regulatory authorities.
TITLE III—CORPORATE RESPONSIBILITY
Sec. 301. Public company audit committees.
Sec. 302. Corporate responsibility for financial reports.
Sec. 303. Improper influence on conduct of audits.
Sec. 304. Forfeiture of certain bonuses and profits.
Sec. 305. Officer and director bars and penalties.
Sec. 306. Insider trades during pension fund blackout periods.
Sec. 307. Rules of professional responsibility for attorneys.
Sec. 308. Fair funds for investors.
TITLE IV—ENHANCED FINANCIAL DISCLOSURES
Sec. 401. Disclosures in periodic reports.
Sec. 402. Enhanced conflict of interest provisions.
Sec. 403. Disclosures of transactions involving management and principal stockholders.
15 USC 7201
note.
Sarbanes-Oxley
Act of 2002.
Corporate
responsibility.
July 30, 2002
[H.R. 3763]
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116 STAT. 746 PUBLIC LAW 107–204—JULY 30, 2002
Sec. 404. Management assessment of internal controls.
Sec. 405. Exemption.
Sec. 406. Code of ethics for senior financial officers.
Sec. 407. Disclosure of audit committee financial expert.
Sec. 408. Enhanced review of periodic disclosures by issuers.
Sec. 409. Real time issuer disclosures.
TITLE V—ANALYST CONFLICTS OF INTEREST
Sec. 501. Treatment of securities analysts by registered securities associations and
national securities exchanges.
TITLE VI—COMMISSION RESOURCES AND AUTHORITY
Sec. 601. Authorization of appropriations.
Sec. 602. Appearance and practice before the Commission.
Sec. 603. Federal court authority to impose penny stock bars.
Sec. 604. Qualifications of associated persons of brokers and dealers.
TITLE VII—STUDIES AND REPORTS
Sec. 701. GAO study and report regarding consolidation of public accounting firms.
Sec. 702. Commission study and report regarding credit rating agencies.
Sec. 703. Study and report on violators and violations
Sec. 704. Study of enforcement actions.
Sec. 705. Study of investment banks.
TITLE VIII—CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY
Sec. 801. Short title.
Sec. 802. Criminal penalties for altering documents.
Sec. 803. Debts nondischargeable if incurred in violation of securities fraud laws.
Sec. 804. Statute of limitations for securities fraud.
Sec. 805. Review of Federal Sentencing Guidelines for obstruction of justice and extensive
criminal fraud.
Sec. 806. Protection for employees of publicly traded companies who provide evidence
of fraud.
Sec. 807. Criminal penalties for defrauding shareholders of publicly traded companies.
TITLE IX—WHITE-COLLAR CRIME PENALTY ENHANCEMENTS
Sec. 901. Short title.
Sec. 902. Attempts and conspiracies to commit criminal fraud offenses.
Sec. 903. Criminal penalties for mail and wire fraud.
Sec. 904. Criminal penalties for violations of the Employee Retirement Income Security
Act of 1974.
Sec. 905. Amendment to sentencing guidelines relating to certain white-collar offenses.
Sec. 906. Corporate responsibility for financial reports.
TITLE X—CORPORATE TAX RETURNS
Sec. 1001. Sense of the Senate regarding the signing of corporate tax returns by
chief executive officers.
TITLE XI—CORPORATE FRAUD AND ACCOUNTABILITY
Sec. 1101. Short title.
Sec. 1102. Tampering with a record or otherwise impeding an official proceeding.
Sec. 1103. Temporary freeze authority for the Securities and Exchange Commission.
Sec. 1104. Amendment to the Federal Sentencing Guidelines.
Sec. 1105. Authority of the Commission to prohibit persons from serving as officers
or directors.
Sec. 1106. Increased criminal penalties under Securities Exchange Act of 1934.
Sec. 1107. Retaliation against informants.
SEC. 2. DEFINITIONS.
(a) IN GENERAL.—In this Act, the following definitions shall
apply:
(1) APPROPRIATE STATE REGULATORY AUTHORITY.—The term
‘‘appropriate State regulatory authority’’ means the State
agency or other authority responsible for the licensure or other
regulation of the practice of accounting in the State or States
15 USC 7201.
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PUBLIC LAW 107–204—JULY 30, 2002 116 STAT. 747
having jurisdiction over a registered public accounting firm
or associated person thereof, with respect to the matter in
question.
(2) AUDIT.—The term ‘‘audit’’ means an examination of
the financial statements of any issuer by an independent public
accounting firm in accordance with the rules of the Board
or the Commission (or, for the period preceding the adoption
of applicable rules of the Board under section 103, in accordance
with then-applicable generally accepted auditing and related
standards for such purposes), for the purpose of expressing
an opinion on such statements.
(3) AUDIT COMMITTEE.—The term ‘‘audit committee’’
means—
(A) a committee (or equivalent body) established by
and amongst the board of directors of an issuer for the
purpose of overseeing the accounting and financial
reporting processes of the issuer and audits of the financial
statements of the issuer; and
(B) if no such committee exists with respect to an
issuer, the entire board of directors of the issuer.
(4) AUDIT REPORT.—The term ‘‘audit report’’ means a document
or other record—
(A) prepared following an audit performed for purposes
of compliance by an issuer with the requirements of the
securities laws; and
(B) in which a public accounting firm either—
(i) sets forth the opinion of that firm regarding
a financial statement, report, or other document; or
(ii) asserts that no such opinion can be expressed.
(5) BOARD.—The term ‘‘Board’’ means the Public Company
Accounting Oversight Board established under section 101.
(6) COMMISSION.—The term ‘‘Commission’’ means the Securities
and Exchange Commission.
(7) ISSUER.—The term ‘‘issuer’’ means an issuer (as defined
in section 3 of the Securities Exchange Act of 1934 (15 U.S.C.
78c)), the securities of which are registered under section 12
of that Act (15 U.S.C. 78l), or that is required to file reports
under section 15(d) (15 U.S.C. 78o(d)), or that files or has
filed a registration statement that has not yet become effective
under the Securities Act of 1933 (15 U.S.C. 77a et seq.), and
that it has not withdrawn.
(8) NON-AUDIT SERVICES.—The term ‘‘non-audit services’’
means any professional services provided to an issuer by a
registered public accounting firm, other than those provided
to an issuer in connection with an audit or a review of the
financial statements of an issuer.
(9) PERSON ASSOCIATED WITH A PUBLIC ACCOUNTING FIRM.—
(A) IN GENERAL.—The terms ‘‘person associated with
a public accounting firm’’ (or with a ‘‘registered public
accounting firm’’) and ‘‘associated person of a public
accounting firm’’ (or of a ‘‘registered public accounting
firm’’) mean any individual proprietor, partner, shareholder,
principal, accountant, or other professional
employee of a public accounting firm, or any other independent
contractor or entity that, in connection with the
preparation or issuance of any audit report—
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116 STAT. 748 PUBLIC LAW 107–204—JULY 30, 2002
(i) shares in the profits of, or receives compensation
in any other form from, that firm; or
(ii) participates as agent or otherwise on behalf
of such accounting firm in any activity of that firm.
(B) EXEMPTION AUTHORITY.—The Board may, by rule,
exempt persons engaged only in ministerial tasks from
the definition in subparagraph (A), to the extent that the
Board determines that any such exemption is consistent
with the purposes of this Act, the public interest, or the
protection of investors.
(10) PROFESSIONAL STANDARDS.—The term ‘‘professional
standards’’ means—
(A) accounting principles that are—
(i) established by the standard setting body
described in section 19(b) of the Securities Act of 1933,
as amended by this Act, or prescribed by the Commission
under section 19(a) of that Act (15 U.S.C. 17a(s))
or section 13(b) of the Securities Exchange Act of 1934
(15 U.S.C. 78a(m)); and
(ii) relevant to audit reports for particular issuers,
or dealt with in the quality control system of a particular
registered public accounting firm; and
(B) auditing standards, standards for attestation
engagements, quality control policies and procedures, ethical
and competency standards, and independence standards
(including rules implementing title II) that the Board
or the Commission determines—
(i) relate to the preparation or issuance of audit
reports for issuers; and
(ii) are established or adopted by the Board under
section 103(a), or are promulgated as rules of the
Commission.
(11) PUBLIC ACCOUNTING FIRM.—The term ‘‘public
accounting firm’’ means—
(A) a proprietorship, partnership, incorporated association,
corporation, limited liability company, limited liability
partnership, or other legal entity that is engaged in the
practice of public accounting or preparing or issuing audit
reports; and
(B) to the extent so designated by the rules of the
Board, any associated person of any entity described in
subparagraph (A).
(12) REGISTERED PUBLIC ACCOUNTING FIRM.—The term ‘‘registered
public accounting firm’’ means a public accounting firm
registered with the Board in accordance with this Act.
(13) RULES OF THE BOARD.—The term ‘‘rules of the Board’’
means the bylaws and rules of the Board (as submitted to,
and approved, modified, or amended by the Commission, in
accordance with section 107), and those stated policies, practices,
and interpretations of the Board that the Commission,
by rule, may deem to be rules of the Board, as necessary
or appropriate in the public interest or for the protection of
investors.
(14) SECURITY.—The term ‘‘security’’ has the same meaning
as in section 3(a) of the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)).
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PUBLIC LAW 107–204—JULY 30, 2002 116 STAT. 749
(15) SECURITIES LAWS.—The term ‘‘securities laws’’ means
the provisions of law referred to in section 3(a)(47) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), as
amended by this Act, and includes the rules, regulations, and
orders issued by the Commission thereunder.
(16) STATE.—The term ‘‘State’’ means any State of the
United States, the District of Columbia, Puerto Rico, the Virgin
Islands, or any other territory or possession of the United
States.
(b) CONFORMING AMENDMENT.—Section 3(a)(47) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) is amended by
inserting ‘‘the Sarbanes-Oxley Act of 2002,’’ before ‘‘the Public’’.
SEC. 3. COMMISSION RULES AND ENFORCEMENT.
(a) REGULATORY ACTION.—The Commission shall promulgate
such rules and regulations, as may be necessary or appropriate
in the public interest or for the protection of investors, and in
furtherance of this Act.
(b) ENFORCEMENT.—
(1) IN GENERAL.—A violation by any person of this Act,
any rule or regulation of the Commission issued under this
Act, or any rule of the Board shall be treated for all purposes
in the same manner as a violation of the Securities Exchange
Act of 1934 (15 U.S.C. 78a et seq.) or the rules and regulations
issued thereunder, consistent with the provisions of this Act,
and any such person shall be subject to the same penalties,
and to the same extent, as for a violation of that Act or
such rules or regulations.
(2) INVESTIGATIONS, INJUNCTIONS, AND PROSECUTION OF
OFFENSES.—Section 21 of the Securities Exchange Act of 1934
(15 U.S.C. 78u) is amended—
(A) in subsection (a)(1), by inserting ‘‘the rules of the
Public Company Accounting Oversight Board, of which such
person is a registered public accounting firm or a person
associated with such a firm,’’ after ‘‘is a participant,’’;
(B) in subsection (d)(1), by inserting ‘‘the rules of the
Public Company Accounting Oversight Board, of which such
person is a registered public accounting firm or a person
associated with such a firm,’’ after ‘‘is a participant,’’;
(C) in subsection (e), by inserting ‘‘the rules of the
Public Company Accounting Oversight Board, of which such
person is a registered public accounting firm or a person
associated with such a firm,’’ after ‘‘is a participant,’’; and
(D) in subsection (f), by inserting ‘‘or the Public Company
Accounting Oversight Board’’ after ‘‘self-regulatory
organization’’ each place that term appears.
(3) CEASE-AND-DESIST PROCEEDINGS.—Section 21C(c)(2) of
the Securities Exchange Act of 1934 (15 U.S.C. 78u–3(c)(2))
is amended by inserting ‘‘registered public accounting firm (as
defined in section 2 of the Sarbanes-Oxley Act of 2002),’’ after
‘‘government securities dealer,’’.
(4) ENFORCEMENT BY FEDERAL BANKING AGENCIES.—Section
12(i) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(i))
is amended by—
(A) striking ‘‘sections 12,’’ each place it appears and
inserting ‘‘sections 10A(m), 12,’’; and
15 USC 7202.
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116 STAT. 750 PUBLIC LAW 107–204—JULY 30, 2002
(B) striking ‘‘and 16,’’ each place it appears and
inserting ‘‘and 16 of this Act, and sections 302, 303, 304,
306, 401(b), 404, 406, and 407 of the Sarbanes-Oxley Act
of 2002,’’.
(c) EFFECT ON COMMISSION AUTHORITY.—Nothing in this Act
or the rules of the Board shall be construed to impair or limit—
(1) the authority of the Commission to regulate the
accounting profession, accounting firms, or persons associated
with such firms for purposes of enforcement of the securities
laws;
(2) the authority of the Commission to set standards for
accounting or auditing practices or auditor independence,
derived from other provisions of the securities laws or the
rules or regulations thereunder, for purposes of the preparation
and issuance of any audit report, or otherwise under applicable
law; or
(3) the ability of the Commission to take, on the initiative
of the Commission, legal, administrative, or disciplinary action
against any registered public accounting firm or any associated
person thereof.
TITLE I—PUBLIC COMPANY
ACCOUNTING OVERSIGHT BOARD
SEC. 101. ESTABLISHMENT; ADMINISTRATIVE PROVISIONS.
(a) ESTABLISHMENT OF BOARD.—There is established the Public
Company Accounting Oversight Board, to oversee the audit of public
companies that are subject to the securities laws, and related matters,
in order to protect the interests of investors and further
the public interest in the preparation of informative, accurate,
and independent audit reports for companies the securities of which
are sold to, and held by and for, public investors. The Board shall
be a body corporate, operate as a nonprofit corporation, and have
succession until dissolved by an Act of Congress.
(b) STATUS.—The Board shall not be an agency or establishment
of the United States Government, and, except as otherwise provided
in this Act, shall be subject to, and have all the powers conferred
upon a nonprofit corporation by, the District of Columbia Nonprofit
Corporation Act. No member or person employed by, or agent for,
the Board shall be deemed to be an officer or employee of or
agent for the Federal Government by reason of such service.
(c) DUTIES OF THE BOARD.—The Board shall, subject to action
by the Commission under section 107, and once a determination
is made by the Commission under subsection (d) of this section—
(1) register public accounting firms that prepare audit
reports for issuers, in accordance with section 102;
(2) establish or adopt, or both, by rule, auditing, quality
control, ethics, independence, and other standards relating to
the preparation of audit reports for issuers, in accordance with
section 103;
(3) conduct inspections of registered public accounting
firms, in accordance with section 104 and the rules of the
Board;
(4) conduct investigations and disciplinary proceedings concerning,
and impose appropriate sanctions where justified upon,
15 USC 7211.
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PUBLIC LAW 107–204—JULY 30, 2002 116 STAT. 751
registered public accounting firms and associated persons of
such firms, in accordance with section 105;
(5) perform such other duties or functions as the Board
(or the Commission, by rule or order) determines are necessary
or appropriate to promote high professional standards among,
and improve the quality of audit services offered by, registered
public accounting firms and associated persons thereof, or otherwise
to carry out this Act, in order to protect investors, or
to further the public interest;
(6) enforce compliance with this Act, the rules of the Board,
professional standards, and the securities laws relating to the
preparation and issuance of audit reports and the obligations
and liabilities of accountants with respect thereto, by registered
public accounting firms and associated persons thereof; and
(7) set the budget and manage the operations of the Board
and the staff of the Board.
(d) COMMISSION DETERMINATION.—The members of the Board
shall take such action (including hiring of staff, proposal of rules,
and adoption of initial and transitional auditing and other professional
standards) as may be necessary or appropriate to enable
the Commission to determine, not later than 270 days after the
date of enactment of this Act, that the Board is so organized
and has the capacity to carry out the requirements of this title,
and to enforce compliance with this title by registered public
accounting firms and associated persons thereof. The Commission
shall be responsible, prior to the appointment of the Board, for
the planning for the establishment and administrative transition
to the Board’s operation.
(e) BOARD MEMBERSHIP.—
(1) COMPOSITION.—The Board shall have 5 members,
appointed from among prominent individuals of integrity and
reputation who have a demonstrated commitment to the
interests of investors and the public, and an understanding
of the responsibilities for and nature of the financial disclosures
required of issuers under the securities laws and the obligations
of accountants with respect to the preparation and issuance
of audit reports with respect to such disclosures.
(2) LIMITATION.—Two members, and only 2 members, of
the Board shall be or have been certified public accountants
pursuant to the laws of 1 or more States, provided that, if
1 of those 2 members is the chairperson, he or she may not
have been a practicing certified public accountant for at least
5 years prior to his or her appointment to the Board.
(3) FULL-TIME INDEPENDENT SERVICE.—Each member of the
Board shall serve on a full-time basis, and may not, concurrent
with service on the Board, be employed by any other person
or engage in any other professional or business activity. No
member of the Board may share in any of the profits of,
or receive payments from, a public accounting firm (or any
other person, as determined by rule of the Commission), other
than fixed continuing payments, subject to such conditions as
the Commission may impose, under standard arrangements
for the retirement of members of public accounting firms.
(4) APPOINTMENT OF BOARD MEMBERS.—
(A) INITIAL BOARD.—Not later than 90 days after the
date of enactment of this Act, the Commission, after consultation
with the Chairman of the Board of Governors
Deadline.
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116 STAT. 752 PUBLIC LAW 107–204—JULY 30, 2002
of the Federal Reserve System and the Secretary of the
Treasury, shall appoint the chairperson and other initial
members of the Board, and shall designate a term of service
for each.
(B) VACANCIES.—A vacancy on the Board shall not
affect the powers of the Board, but shall be filled in the
same manner as provided for appointments under this
section.
(5) TERM OF SERVICE.—
(A) IN GENERAL.—The term of service of each Board
member shall be 5 years, and until a successor is appointed,
except that—
(i) the terms of office of the initial Board members
(other than the chairperson) shall expire in annual
increments, 1 on each of the first 4 anniversaries of
the initial date of appointment; and
(ii) any Board member appointed to fill a vacancy
occurring before the expiration of the term for which
the predecessor was appointed shall be appointed only
for the remainder of that term.
(B) TERM LIMITATION.—No person may serve as a
member of the Board, or as chairperson of the Board,
for more than 2 terms, whether or not such terms of
service are consecutive.
(6) REMOVAL FROM OFFICE.—A member of the Board may
be removed by the Commission from office, in accordance with
section 107(d)(3), for good cause shown before the expiration
of the term of that member.
(f) POWERS OF THE BOARD.—In addition to any authority
granted to the Board otherwise in this Act, the Board shall have
the power, subject to section 107—
(1) to sue and be sued, complain and defend, in its corporate
name and through its own counsel, with the approval of the
Commission, in any Federal, State, or other court;
(2) to conduct its operations and maintain offices, and
to exercise all other rights and powers authorized by this Act,
in any State, without regard to any qualification, licensing,
or other provision of law in effect in such State (or a political
subdivision thereof);
(3) to lease, purchase, accept gifts or donations of or otherwise
acquire, improve, use, sell, exchange, or convey, all of
or an interest in any property, wherever situated;
(4) to appoint such employees, accountants, attorneys, and
other agents as may be necessary or appropriate, and to determine
their qualifications, define their duties, and fix their
salaries or other compensation (at a level that is comparable
to private sector self-regulatory, accounting, technical, supervisory,
or other staff or management positions);
(5) to allocate, assess, and collect accounting support fees
established pursuant to section 109, for the Board, and other
fees and charges imposed under this title; and
(6) to enter into contracts, execute instruments, incur liabilities,
and do any and all other acts and things necessary,
appropriate, or incidental to the conduct of its operations and
the exercise of its obligations, rights, and powers imposed or
granted by this title.
Contracts.
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PUBLIC LAW 107–204—JULY 30, 2002 116 STAT. 753
(g) RULES OF THE BOARD.—The rules of the Board shall, subject
to the approval of the Commission—
(1) provide for the operation and administration of the
Board, the exercise of its authority, and the performance of
its responsibilities under this Act;
(2) permit, as the Board determines necessary or appropriate,
delegation by the Board of any of its functions to an
individual member or employee of the Board, or to a division
of the Board, including functions with respect to hearing, determining,
ordering, certifying, reporting, or otherwise acting as
to any matter, except that—
(A) the Board shall retain a discretionary right to
review any action pursuant to any such delegated function,
upon its own motion;
(B) a person shall be entitled to a review by the Board
with respect to any matter so delegated, and the decision
of the Board upon such review shall be deemed to be
the action of the Board for all purposes (including appeal
or review thereof); and
(C) if the right to exercise a review described in
subparagraph (A) is declined, or if no such review is sought
within the time stated in the rules of the Board, then
the action taken by the holder of such delegation shall
for all purposes, including appeal or review thereof, be
deemed to be the action of the Board;
(3) establish ethics rules and standards of conduct for Board
members and staff, including a bar on practice before the
Board (and the Commission, with respect to Board-related matters)
of 1 year for former members of the Board, and appropriate
periods (not to exceed 1 year) for former staff of the Board;
and
(4) provide as otherwise required by this Act.
(h) ANNUAL REPORT TO THE COMMISSION.—The Board shall
submit an annual report (including its audited financial statements)
to the Commission, and the Commission shall transmit a copy
of that report to the Committee on Banking, Housing, and Urban
Affairs of the Senate, and the Committee on Financial Services
of the House of Representatives, not later than 30 days after the
date of receipt of that report by the Commission.
SEC. 102. REGISTRATION WITH THE BOARD.
(a) MANDATORY REGISTRATION.—Beginning 180 days after the
date of the determination of the Commission under section 101(d),
it shall be unlawful for any person that is not a registered public
accounting firm to prepare or issue, or to participate in the preparation
or issuance of, any audit report with respect to any issuer.
(b) APPLICATIONS FOR REGISTRATION.—
(1) FORM OF APPLICATION.—A public accounting firm shall
use such form as the Board may prescribe, by rule, to apply
for registration under this section.
(2) CONTENTS OF APPLICATIONS.—Each public accounting
firm shall submit, as part of its application for registration,
in such detail as the Board shall specify—
(A) the names of all issuers for which the firm prepared
or issued audit reports during the immediately preceding
calendar year, and for which the firm expects to prepare
or issue audit reports during the current calendar year;
15 USC 7212.
Deadline.
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116 STAT. 754 PUBLIC LAW 107–204—JULY 30, 2002
(B) the annual fees received by the firm from each
such issuer for audit services, other accounting services,
and non-audit services, respectively;
(C) such other current financial information for the
most recently completed fiscal year of the firm as the
Board may reasonably request;
(D) a statement of the quality control policies of the
firm for its accounting and auditing practices;
(E) a list of all accountants associated with the firm
who participate in or contribute to the preparation of audit
reports, stating the license or certification number of each
such person, as well as the State license numbers of the
firm itself;
(F) information relating to criminal, civil, or administrative
actions or disciplinary proceedings pending against
the firm or any associated person of the firm in connection
with any audit report;
(G) copies of any periodic or annual disclosure filed
by an issuer with the Commission during the immediately
preceding calendar year which discloses accounting disagreements
between such issuer and the firm in connection
with an audit report furnished or prepared by the firm
for such issuer; and
(H) such other information as the rules of the Board
or the Commission shall specify as necessary or appropriate
in the public interest or for the protection of investors.
(3) CONSENTS.—Each application for registration under this
subsection shall include—
(A) a consent executed by the public accounting firm
to cooperation in and compliance with any request for
testimony or the production of documents made by the
Board in the furtherance of its authority and responsibilities
under this title (and an agreement to secure and
enforce similar consents from each of the associated persons
of the public accounting firm as a condition of their continued
employment by or other association with such firm);
and
(B) a statement that such firm understands and agrees
that cooperation and compliance, as described in the consent
required by subparagraph (A), and the securing and
enforcement of such consents from its associated persons,
in accordance with the rules of the Board, shall be a
condition to the continuing effectiveness of the registration
of the firm with the Board.
(c) ACTION ON APPLICATIONS.—
(1) TIMING.—The Board shall approve a completed application
for registration not later than 45 days after the date
of receipt of the application, in accordance with the rules of
the Board, unless the Board, prior to such date, issues a written
notice of disapproval to, or requests more information from,
the prospective registrant.
(2) TREATMENT.—A written notice of disapproval of a completed
application under paragraph (1) for registration shall
be treated as a disciplinary sanction for purposes of sections
105(d) and 107(c).
(d) PERIODIC REPORTS.—Each registered public accounting firm
shall submit an annual report to the Board, and may be required